October 2015
This report follows a nine month inquiry chaired by Chi Onwurah MP
and Professor Steve Evans.
This report was written by Toby Moore (Senior Researcher,
Manufacturing Commission) and Michael Folkerson (Manager,
Manufacturing, Design and Innovation).
This inquiry and report were kindly supported by the EPSRC Centre
for Innovative Manufacturing in Industrial Sustainability.
Contact the Manufacturing Commission at:
Policy Connect
CAN Mezzanine
32-36 Loman Street
London SE1 0EH
www.policyconnect.org.uk/apmg/manufacturing-commission
‘It is absolutely vital
that our ability to
make things, and to
make them well,
is made stronger
and more resilient
in an increasingly
volatile world’
Chi Onwurah MP
Contents
Foreword6
Executive Summary
8
Recommendations10
List of acronyms
14
Introduction16
Industrial Sustainability – Challenges and Opportunities
17
Economic Theory – Industrial Policy
30
Section 1: Leadership36
Policy Recommendations:
48
Section 2: Resilience50
Policy Recommendations:
66
Section 3: Innovation68
Policy Recommendations:
84
Section 4: Collaboration86
Policy Recommendations:
100
Section 5: System Redesign102
Policy Recommendations:
116
Bibliography118
Steering Group & Secretariat
125
Evidential Submissions
126
About the Manufacturing Commission
128
Acknowledgements128
6
Industrial Evolution - Making British Manufacturing Sustainable
Foreword
Foreword
Chi Onwurah MP & Professor Steve Evans
Since the financial crash of 2008, the manufacturing sector in
the UK has been firmly placed back into the political and popular
spotlight. It provided a surprising and welcome bulwark of relative stability and good news while the financial sector seemingly
imploded. The Coalition government undertook an active industrial
strategy, foreign direct investment flowed in, and many companies
started reshoring production.
And yet, this increased attention also began to highlight some
uncomfortable realities: while our manufacturing prowess was once
unrivalled anywhere in the world, other countries are now producing far more than we do. We have been suffering a skills shortage
for a number of years. Energy and raw materials are becoming more
volatile. Our productivity is sluggish. Much of our infrastructure is
strained. Many of our most hallowed industries are struggling, and
we are polluting the world we live in.
These issues, combined with rapidly advancing technological developments, have spurred on high quality research into what manufacturing may look like in the near and not-so-distant future. Many
have focused on the possibilities afforded by additive manufacturing
(3D printing), the internet of things (Industry 4.0), reshoring,
automation, redistributed manufacturing and mass customisation.
The Government Office for Science itself produced the comprehensive Foresight report The Future of Manufacturing: A New Era of
Opportunity and Challenge for the UK, which took a strategic look
at the manufacturing sector all the way to 2050.
We undertook this inquiry because we believe that none of this
research has so far adequately addressed, from a policy perspective,
some of the major vulnerabilities of present day manufacturing
in the UK, or fully appreciated how we could take advantage of
the complete range of opportunities on the horizon. Faced with a
myriad of significant challenges, what would government and the
sector itself need to do in order to survive and thrive?
Making British manufacturing sustainable means making it competitive over the long-term. It must have the right fundamental
building blocks, from a solid skills base to a dynamic research
environment that fosters new inventions and commercialises them
into successful businesses. It must be resilient against external
shocks, and have the right ingredients to grow. It must also work in
harmony with the rest of the world.
As global prosperity increases, particularly in developing countries,
so do the ranks of middle-class consumers and the total global
Industrial Evolution - Making British Manufacturing Sustainable
Foreword
7
output of produced goods to satisfy growing demand. The vast
majority of those goods are single-use, many of their raw materials
are getting harder to extract, and the processes used to make them
are often highly polluting. UK manufacturers are used to fierce
competition for market share at a global level, but may increasingly
face the prospect of having to compete for access to critical raw
materials. If we continue along the same path, there will come a
time when we can no longer access the minerals and chemicals
we need to make things, and our environment will be irrevocably
damaged.
This report, compiled over the course of a nine-month inquiry with
input from across business, academia, the public sector and the
civil service, sets out how we can start redesigning our industrial
system to make it more sustainable, improve our national security,
and ultimately enhance our quality of life. The UK has some of
the most efficient and productive factories in the world, and we
have a wave of new production technologies emerging. But these
are the exception rather than the rule. We believe that we must
take advantage of this leadership moment to make the UK more
resilient and a provider of solutions to the rest of the world. These
recommendations are primarily directed towards policy-makers,
though sustainable manufacturing simply will not become a reality
unless it is embraced wholeheartedly by businesses as part of their
strategic planning. We call on all Parliamentarians to embrace the
potential of a thriving twenty-first century manufacturing sector,
efficient, clean and resilient, and embedded in healthy communities
around the country. By working with all the relevant stakeholders,
the recommendations outlined in this report, and the exciting new
manufacturing sector they allude to, are eminently achievable.
Britain gave birth to the Industrial Revolution over two centuries
ago. In this new world of constrained resources, growing populations and planetary boundaries, we must fundamentally change the
way we make things. We ultimately need another industrial revolution, based on a deeper understanding of the interaction between
manufacturing and the physical world it takes place in.
It is time for us to recognise the economic, environmental and social
problems that current methods of production engender, and begin
leading the way in making manufacturing truly sustainable.
In short, it is time for an Industrial Evolution.
Chi Onwurah MP
Co-Chair
Professor Steve Evans
Co-Chair
8
Industrial Evolution - Making British Manufacturing Sustainable
Executive Summary
Executive Summary
The long-term environmental constraints on the world’s ecosystem
pose specific challenges for the manufacturing sector, in addition to
those that are shared by all inhabitants of the planet. These challenges
go beyond climate change. Population growth and continued
economic development amongst a new global middle class will put
significant pressure on global supplies of resources and water. If UK
manufacturers are to continue to survive and flourish in this future
landscape, they will need to be responsive and resilient to these
shocks, while also being at the forefront of developing innovative new
ways of meeting society’s needs.
Although many of the trends which will shape the future landscape
for UK manufacturers are beyond our direct control, our response
to these trends is not. UK manufacturers and policy-makers face the
choice of whether to be reactive to threats like material insecurity,
loss of competitiveness and worsening climate change; or proactive in
recognising future challenges, taking decisive action, and seizing the
opportunities that will arise from the necessity of a global shift toward
sustainability.
In areas such as clean technologies, eco-design and new business
models, the UK is well placed to be a world leader, and to take
advantage of the growing global markets for more sustainable goods
and ideas. While also serving environmental objectives, a sector-wide
focus on productivity gains through energy and resource efficiency
should equally be regarded as an economic priority. The global market
for sustainable business operations is expected to reach between US
$1.5 trillion - $4.5 trillion by 2020. Conservative estimates of the
benefits the UK could gain through energy- and resource-efficiency
amount to £10 billion per annum in additional profit for the
sector, 300,000 new jobs and a 4.5% reduction in our total annual
greenhouse gas emissions.
Many firms have already made staggering advances in their use
of materials, water and energy. However too many others are not
treating this as a strategic priority. On a number of different fronts,
policy has a crucial role in helping to realise the economic, social and
environmental benefits of a more sustainable industrial system. This
report addresses this challenge through five key areas of focus for
policymakers: Leadership, Resilience, Innovation, Collaboration and
System Change.
The key determinant of firm-level performance on non-labour
productivity is not so much technology, but leadership. There is
overwhelming evidence of many ‘green’ initiatives that would raise,
not lower, company profits. However, these win-win measures remain
unrealised due to barriers and constraints around firm decision-
Industrial Evolution - Making British Manufacturing Sustainable
Executive Summary
making. Too many managers remain unaware of the extent of the
benefits that could be achieved through greater efficiency. Too many
firms are structured in such a way that responsibility for resource and
energy efficiency is mired at middle-management level, rather than
being a key consideration in the strategic direction of the company
from the CEO on down. Too many firms are short-termist in their
focus and their decision-making, rather than taking a long-term
view of the shape of future markets and how they should position
themselves to take advantage of this. Policy-makers must consider
how they can focus management attention on these potential gains,
and help to promote long-term strategic investment in sustainability.
Future challenges around material and energy security and
decarbonisation efforts could prove hugely disruptive to the UK
economy unless concerted efforts are made to develop resilience at a
national level. China’s decision in 2010 to restrict the export of rare
earth elements – of which it produces 97% of global supply – brought
the issue of critical materials to the forefront of many countries’
minds in terms of strategic economic interest and national security.
However, the UK currently lacks a coordinated and coherent approach
to identifying its potential vulnerabilities, and developing long-term
strategies to mitigate them.
With regard to new technologies, the UK must build an innovation
system which is commensurate to the challenges and opportunities
presented by industrial sustainability. The UK has for many years
lagged behind its competitors on R&D expenditure, and on the
scale and ambition of its public innovation system. The state must
be an active player in the innovation process, not merely a passive
corrector of market failures, topping-up the supply of basic research or
nudging business incentives toward more R&D. Failure to support UK
manufacturers at the same level as our competitors means that we will
be less able to take advantage of the growing global markets for lowcarbon technologies, and less able to address sustainability challenges
ourselves.
Greater collaboration between companies and other actors must
also be a central part of a more sustainable manufacturing system.
Although there are great potential benefits to working together
across industries, supply chains, with universities and with
other intermediary institutions, doing so requires forging deeper
institutional connections and personal relationships which sit outside
of businesses’ core focus. Policy can help the development of these
linkages, and can act to convene various groups around particular
challenges of sustainability, which are unlikely to be overcome through
individual efforts alone.
Finally, manufacturers are increasingly experimenting with new ways
of meeting customers’ needs. This includes shifting from providing
products to providing services, in a way that separates the use of
a product from its ownership; or circular economy models where
products are designed and manufactured for continuous reuse, and
value is captured from ‘waste’ wherever possible. Policy-makers must
be attuned to the possibilities that innovative business models present,
and the ways in which policy can better support their emergence.
9
10
Industrial Evolution - Making British Manufacturing Sustainable
Recommendations
Recommendations
Leadership
1. The government should promote energy
efficiency measures through the provision of
low-interest loans, repaid through subsequent
savings from efficiency gains.
2. B
usiness expenditure on efficiency measures
which build national resilience should be taxdeductible, expanding the R&D tax credit into
a resilience, research and development (RR&D)
tax credit.
3. C
arbon reduction schemes should be redesigned
to force top management attention on to savings
opportunities through revisiting the Carbon
Reduction Commitment (CRC).
4. Measures
to decrease the knowledge gap on
energy and resource efficiency, such as data
sharing and ‘sustainability champions’ within
the firm hierarchy, should be promoted.
5. Greater incentives for capital investment in
low-carbon plant and machinery should be
prioritised over cuts to corporate taxation.
6. S
ustainability should be entrenched across
the UK’s education system, particularly in
engineering and management courses, and
measures to improve management skills among
UK executives should be promoted.
Resilience
7.A new ‘challenge-focused’ Catapult should
be established to examine and build our
understanding around cross-sectoral areas of
concern relating to resilience, and to convene
relevant actors around addressing these issues.
8. G
overnment should prioritise measures to
increase the reliability of renewables and to
mitigate their intermittency.
9. The Office of National Statistics should develop
an enhanced data infrastructure for tracking
material flows.
10. T
he Energy Intensive Industries 2050
decarbonisation roadmaps should be expanded
into action plans.
11. A
n Office for Resource Management should
be established within BIS to advise and
coordinate policy-makers on the challenges and
opportunities around resource security.
Industrial Evolution - Making British Manufacturing Sustainable
Recommendations
Innovation
12. The scale and ambition of the UK’s innovation
network should match that of our competitors,
as well as the extent of the opportunities
around sustainability. Publically funded R&D
should be increased in order to place the UK
economy on a more even standing with other
OECD nations.
13. Government should make greater use
of procurement to provide a market for
sustainably manufactured goods, for instance
through ensuring greater engagement with
the Small Business Research Initiative (SBRI)
programme.
14. E
xemptions from the Climate Change Levy
in the form of Climate Change Agreements
should be reviewed, and consideration given to
progressively shifting support towards R&D in
clean technology and renewables.
15. T
he UK should take a lead in establishing
standards for open data in energy and
resource efficiency.
11
Collaboration
16. The industrial decarbonisation roadmaps
undertaken by BIS and DECC should be
expanded to other key industries, with a
broader remit around long-term, strategic
challenges faced by the sector.
17. The Competition and Markets Authority (CMA)
should be tasked with working more closely
with trade associations and business consortia
to provide guidance at an earlier stage on data
sharing and other forms of collaboration.
18. Government should expand efforts to foster
voluntary agreements around the efficient use
of materials and waste reduction.
19. The National Industrial Symbiosis Programme
(NISP) should be refunded as a national
initiative.
12
Industrial Evolution - Making British Manufacturing Sustainable
Recommendations
System Redesign
20. G
overnment should consider tying support
for energy- and resource-efficiency to other
green measures. This can help counter the
rebound effect by encouraging savings to be
directed toward other projects that promote
sustainability.
21. R
esponsibility for resource management
infrastructure should be unified at a
UK-wide level, and national infrastructure
institutions must ensure that long-term
investment decisions are consistent with
sustainable manufacturing, and do not ‘lock-in’
unsustainable activities.
22. G
overnment should promote alternative
business models, and remove barriers to
their development and adoption.
23. G
overnment should work to reduce
uncertainty around more sustainable
manufacturing business models by
establishing standards for remanufactured
products and utilising government
procurement to provide a market for such
products.
24. I nnovation and coordinating bodies should
provide greater support to innovative
business models.
14
Industrial Evolution - Making British Manufacturing Sustainable
List of acronyms
List of acronyms
APMG
APSRG
BIS
BSI
CCC
CCS
CEO
CME
CRM
DARPA
DECC
DEFRA
EII
EPSRC
EU
GDP
GIB
LEP
LME
LSE
NISP NPV
OECD
Ofgem
ONS
PGM
POLFREE
PSS
R&D
REACH
REE
RSA
SBIR
SBRI
SME
TUC
UCL
UNEP
UNIDO
VC
WMS
WRAP
WTO
All-Party Parliamentary Manufacturing Group
All-Party Sustainable Resource Group
Department of Business, Innovation and Skills
British Standards Institution
Committee on Climate Change
Carbon Capture and Storage
Chief Executive Officer
Co-ordinated Market Economy
Critical Raw Material
Defence Advanced Research Projects Agency
Department of Energy and Climate Change
Department for Environment, Food and Rural Affairs
Energy-Intensive Industries
Engineering and Physical Sciences Research Council
European Union
Gross Domestic Product
Green Investment Bank
Local Enterprise Partnership
Liberal Market Economy
London School of Economics and Political Science
National Industrial Symbiosis Programme
Net Present Value
Organisation for Economic Co-operation and Development
Office of Gas and Electricity Markets
Office for National Statistics
Platinum Group Metals
Policy Options for a Resource Efficient Economy
Product Service System
Research and Development
Registration, Evaluation, Authorisation and restriction of Chemicals
Rare Earth Elements
Royal Society for the encouragement of Arts, Manufactures and Commerce
Small Business Innovation Research
Small Business Research Initiative
Small- and Medium-sized Enterprise
Trade Union Congress
University College London
United Nations Environmental Programme
United Nations Industrial Development Organization
Venture Capital
World Management Survey
Waste and Resources Action Programme
World Trade Organization
INTRODUCTION
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Industrial Sustainability –
Challenges and Opportunities
The Future Landscape for British Manufacturing
The long-term environmental constraints on the world’s ecosystem
pose specific challenges for the manufacturing sector, in addition to
those that are shared by all inhabitants of the planet. Manufacturing
is more intensive than the general economy in its use of energy and
resources, and its emission of carbon into the atmosphere. Thus,
as a responsible section of society, it faces a greater challenge than
most in shifting to a mode of operation which is consistent with the
needs of future generations.
The challenges faced by the sector go beyond climate change.
Population growth and continued economic development in the
global south will put significant pressure on world supplies of
resources and water, heighten risks to biodiversity and contribute
to air and water pollution. In addition to mitigating the adverse
impacts of its own processes, manufacturing will need to be
responsive and resilient to shocks and pressures which are beyond
the control of any one economic agent or political authority.
Manufacturing also faces some fundamental shifts in what society
demands of it. At a time when the world is witnessing the rise
of a new global middle class of consumers, the way in which the
material needs of the middle class have traditionally been met –
readily-available consumer goods mass-produced within a linear
system of production, ownership and disposal – is no longer fit for
purpose. Furthermore, the needs of the future are not static, but
will evolve alongside future challenges. Society will require not just
that its demand for material goods be met in a way which does not
endanger the global ecosystem, but that manufacturing plays a key
role in providing solutions to the world’s problems.
Although many of the trends which will shape the future landscape
for UK manufacturers are beyond our direct control, our response
to these trends is not. UK manufacturers and policy-makers face the
choice of whether to be reactive to threats like material insecurity,
loss of competitiveness and worsening climate change; or proactive
in recognising future challenges, taking decisive action, and seizing
the opportunities that will arise from the necessity of a global shift
toward sustainability.
17
18
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Figure 1: What A Sustainable Economy Could Look Like
WHAT A SUSTAINABLE INDUSTRIAL SYSTEM COULD LOOK LIKE
GENERATES
GENERATESENERGY
ENERGYONSITE
ONSITEAND
AND
CONTRIBUTES
TO
THE
STABILITY
CONTRIBUTES TO THE STABILITYOFOF
THE
THENATIONAL
NATIONALGRID
GRID
COLLABORATES
COLLABORATESWITH
WITHCOMPETITORS
COMPETITORS
TOTOBENCHMARK
BENCHMARKPERFORMANCES
PERFORMANCESAND
AND
REDUCE
REDUCEENVIRONMENTAL
ENVIRONMENTALIMPACTS
IMPACTS
ACROSS
ACROSSTHE
THESECTOR
SECTOR
EXCHANGES
EXCHANGESWASTE,
WASTE,BY-PRODUCTS
BY-PRODUCTS
AND
ENERGY
WITH
AND ENERGY WITHOTHER
OTHERSECTORS
SECTORS
TOTOMAKE
MAKEBETTER
BETTERUSE
USEOFOFALL
ALLINPUTS
INPUTS
ENGAGES
ENGAGESWITH
WITHUNIVERSITIES
UNIVERSITIESAND
AND
GOVERNMENT
GOVERNMENTINNOVATION
INNOVATIONAGENCIES
AGENCIES
ONONNEW
NEWGREEN
GREENTECHNOLOGIES
TECHNOLOGIES
THE SUSTAINABLE
MANUFACTURER...
WORKS
WORKSTOTODEVELOP
DEVELOPNEW
NEWBUSINESS
BUSINESS
MODELS
MODELSWHICH
WHICHMEET
MEETCONSUMERS
CONSUMERS
NEEDS
NEEDS
Fig. 1 “What a Sustainable System Could Look Like”
WORKS
WORKSACROSS
ACROSSTHE
THESUPPLY
SUPPLYCHAIN
CHAIN
TOTOENSURE
ENSURETHAT
THATPRODUCTS
PRODUCTSARE
ARE
DESIGNED
DESIGNEDFOR
FORCIRCULARITY
CIRCULARITYAND
AND
RECOVERED
RECOVEREDBACK
BACKINTO
INTOTHE
THE
PRODUCTION
PRODUCTIONSYSTEM
SYSTEM
PROVIDES
PROVIDESHIGH-SKILL
HIGH-SKILLAND
AND
WELL-PAID
JOBS
WELL-PAID JOBSFOR
FORSOCIETY
SOCIETY
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
ENVIROMENTAL
ENVIROMENTAL
MEGA
MEGATREND
TREND
Climate
change
afftecting
Climate
change
afftecting
supply
chains
and
supply chains andemmisions
emmisions
RESOURCE
RESOURCEDEMAND
DEMAND
Increasing
demand
Increasing
demand
forformaterials
materials
RESOURCE
RESOURCEDEMAND
DEMAND
Increasing
Increasingdemand
demandforforwater
water
19
ENVIROMENTAL
ENVIROMENTAL
MEGA
MEGATREND
TREND
Population
growth
Population
growthandand
urbanistation
urbanistation
A NUMBER OF POWERFUL
ENVIRONMENTAL TRENDS ARE LIKELY
TO CONVERGE TO TRANSFORM
MANUFACTURING ACTIVITIES BY 2050
These trends will lead to future sustainability
becoming central to resilience and competitiveness
REACTIVE
REACTIVETREND
TREND
Sustainability
standards
Sustainability
standards
forforproducts
products
REACTIVE
REACTIVETREND
TREND
Consumer
Consumerpull
pullforfor
sustainable
products
sustainable products
RESOURCE
RESOURCEDEMAND
DEMAND
Increasing
Increasingdemand
demandforforland
land
RESOURCE
RESOURCEDEMAND
DEMAND
Increasing
Increasingdemand
demandforforenergy
energy
REACTIVE
REACTIVETREND
TREND
‘Pricing
‘Pricingthetheenvironment’
environment’
Fig. 2 “Trends Influencing the Future Landscape for Manufacturers.” Source: adapted from Government Office for Science;
The Future of Manufacturing, 2013, p 149
As identified in the Government Office for Science’s Foresight report, “The
Future of Manufacturing” (2013), the circumstances in which manufacturers will
have to operate in future will be very different. Environmental ‘megatrends’ in
the form of climate change and population growth, and increased competition
for energy, water, and materials, will necessitate significant shifts in the way
manufacturers operate. In the face of these challenges, the reactive trends will be
consumer demands for more sustainable products, and for government action
in the form of higher standards around the impact and efficiency of production,
and the increasing use of mechanisms to ‘price’ the impact of production on
the environment. It should be understood that many of these challenges are
interlinked: not only will they likely reinforce one another, but some options for
addressing one challenge may also exacerbate others. For instance, policies that
encourage switching to diesel-powered cars have had a positive effect on CO2
emissions but have generated significant public health concerns as to the effects of
other pollutants on air quality.
20
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
WHERE WE EXCEL
AREAS IN WHICH THE UK IS WELL
PLACED TO BE A WORLD LEADER, AND WHICH
WE SHOULD CAPITALISE UPON
CLEAN TECHNOLOGY
CREATIVE SECTOR
The global market for sustainable business
operations is expected to reach between
US $1.5 trillion - $4.5 trillion by 2020.1
The UK has significant opportunities for
growth in areas such as new materials,
automation and fuel cells.
The UK’s creative sector is well placed to
play a role in addressing the challenges of
sustainability within the manufacturing
sector, and there has been a marked shift in
university-level design courses in focusing
on sustainability and system-wide design
(as opposed to the creation of products
for consumption).
ENERGY EFFICIENCY
BUSINESS MODEL INNOVATION
The UK has some of the most efficient
individual factories in the world. Just
as the techniques that were pioneered
in Japan in the 1980s have been copied by
manufacturers around the world, and are
synonymous with Japanese manufacturing,
the same could be true for approaches
created in the UK.
The UK is a leader on thinking
and analysis on how new business
models can meet consumers’ needs
in more environmentally-friendly ways.
Better implementation of these ideas
could mean that they are something
the rest of the world looks to
the UK for.
1
The
focus of this report is on the role of policy in fostering a transition towards a
sustainable industrial economy. Here, policy moves from being an abstract feature
of the business landscape to a being driver of change, and a determinant of both its
rate and direction. As Schumpeter argued, economic transformations entail huge
opportunities for innovators and disruptive new-entrants to the market, whether
such transformations are technological, economic or social in nature.2 This is the
process of ‘creative destruction’. Policy can help to shape the emergence of new
markets and whole new industries for sustainable manufacturing, and can lay
the foundations for greater private sector investment in skills, supply chains and
infrastructure that are complementary to this direction of change.3
1
2
3
Tennant, M; “Sustainability and Manufacturing”, 2013, 14.
Bowen, A and Fankhauser, S; “The green growth narrative: Paradigm shift or just spin?”, Global Environmental Change, 2011.
Perez, C “Steering Economies toward the next Golden Age”, Mission-Oriented Finance for Innovation, Policy Network, 2015.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Yet as much as we might be tempted to focus on the ‘creative’ aspect of ‘creative
destruction’, the necessary corollary is that there will be losers as well as winners
in this process. Furthermore, such transformations do not remain neatly confined
to the economic sphere. Established economic relations are fundamental to wider
social structures that shape peoples’ lives; be it workers who have built up a
skill-set specific to a threatened sector, or a local community that has developed a
generations-long relationship with a local factory. Environmental and economic
concerns demand that policy be designed to ensure that UK industry is at the
forefront of the shift toward sustainability, ready to capitalise on the need for more
efficient processes, products and business models. Yet at the same time policy must
be concerned with mitigating the economic dislocation that might accompany this
transformation. Change within the industrial economy will inevitably occur – it is
up to us to determine what we make of it.
Opportunities presented by a shift to a Sustainable Industrial Economy
The Committee on Climate Change (CCC) projections call for direct industry
emissions to fall to 65 MtCO2 by 2030 – a reduction of around 40% from 2012
levels.4 In concrete terms, the central challenge of sustainable manufacturing is
to shift toward production systems which continue to create the things society
wants and needs, while using a fraction of the material and energy inputs.5 Though
often framed as a ‘green’ objective, this can equally be understood as a dramatic
increase in multi-factor productivity; increasing the value derived from every tonne
of material, litre of water and kilowatt of energy we input into the production
process. Given the historical lag in UK productivity behind other developed
nations, and the recent ‘puzzle’ of stalled GDP per worker since the global financial
crisis, this is an opportunity the UK should embrace. A dedicated policy focus on
resource productivity has the potential to boost per capita living standards while
also enhancing wellbeing by fostering a more environmentally-friendly industrial
system.
The benefits of moving to a broader adoption of best-practice efficiency methods,
separate to the development and diffusion of new technology, appear to be
substantial. It is difficult to accurately estimate the extent of the potential gains
that could be made through improving non-labour productivity, and much more
needs to be done to quantify this. However, the Next Manufacturing Revolution
report found that a conservative estimate of the impact of such a shift amounts to:
4
5
•£10 billion per annum in additional profit for the sector;
•300,000 new jobs; and
•A 4.5% reduction in the total annual greenhouse gas emissions of the UK
Committee on Climate Change; Fourth Carbon Budget Review: Chapter 4: Reducing emissions from industry. 2013, 90.
Evans et al. “toward a sustainable industrial system”, 2009, 7.
21
22
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
POTENTIAL BENEFITS TO THE UK OF NON-LABOUR PRODUCTIVITY GAINS
1
2
3
ECONOMIC
ENVIRONMENTAL
SOCIAL
£10b pa
27 mtCO e
300,000 new jobs
12% profit increase for
UK manufacturers
Less GHG emissions p.a.
(4.5% reduction in total
UK emissions)
12% increase in UK
manufacturing jobs
£
£
2
Fig. 3 Potential Benefits To The Uk Of Non-Labour Productivity Gains”;
Source: adapted from Lavery, G. et al, Next Manufacturing Revolution, Lavery Pennell, 2degrees, Institute for Manufacturing, 2013.
Other benefits from a sustainable industrial sector are likely to
include decreased pollution and resulting health issues, a reduction
in the burden placed on transport infrastructure and the national
energy grid, and reduced waste going to landfill or incineration.6
With the right alignment of incentives, market systems have shown
themselves capable of such dramatic efficiency improvements in
the past. Cumulative investment in labour-saving technology has
seen labour productivity increase 15-fold in the US since 1870.7
McKinsey Global Institute agrees that “there is an opportunity to
achieve a resource productivity revolution comparable with the
progress made on [labour] productivity during the 20th century”.8
However, market forces alone are unlikely to generate sufficient
progress in material and energy productivity within a critical mass
of manufacturing activities, at least until scarcity of those inputs
reaches a stage which is disruptive to the economy as a whole, and
resource-intensive industries in particular.9
6 5 Lavery, G et al, Next Manufacturing Revolution, Lavery Pennell, 2degrees, Institute for Manufacturing, 2013 11.
7Maddison, A cited in United Nations Industrial Development Organisation (UNIDO); Green Growth: From Labour to Resource Productivity;
2013.
8 McKinsey Global Institute, Resource Revolution: Meeting the World’s Energy, Materials, Food and Water Needs, 2011, 3.
9Furthermore, so long as labour typically remains a relatively expensive input for manufacturers, compared to resources, market incentives will
exist for firms to economise on labour, even if it means increasing environmental impacts. Sustainable Development Commission,
Redefining Prosperity, 2003.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
23
UK MANUFACTURERS HAVE FOCUSED ON CUTTING JOBS,
WHILE NON-LABOUR RESOUCRES HAVE INCREASED
450
5
+0.4% CAGR 2004-2011
400
350
4.5
4X
4
5X
300
HEADCOUNT -3.7% CAGR
3.5
3
250
2.5
200
2
150
1.5
-3.2% CAGR 2004-2011
100
Million Full Time Employees
1
0.5
50
0
UK Manufacturing headcount
(right hand axis)
UK Manufacturing purchases
of goods, materials and services
(£billions)
11
20
7
6
8
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
19
9
19
9
19
9
5
0
19
9
Adjusted For Inflation To £2011 And Production Indexed 2011
Uk Manufacturing Costs Over Time
UK Manufacturing
employment costs
(£billions)
CAGR = compound annual growth rate
Fig. 4 “UK Manufacturers Have Focused On Cutting Jobs, While Non-Labour Resoucres Have Increased”, source: Adapted from Lavery,
G et al, Next Manufacturing Revolution, Lavery Pennell, 2degrees, Institute for Manufacturing, 2013
Figure 410 shows the aggregate costs of the UK manufacturing
sector, divided into labour and non-labour costs, overlaid with
a headcount of total employees in the sector. Total spending on
labour costs have continued to decrease alongside total number of
employees within the sector, which now number 1.5 million fewer
than in the late 1990s. However, no progress has been made on
non-labour costs in the years since 2004, with commodity price
increases offsetting any efforts toward greater efficiency.
10 Lavery, G et al, Next Manufacturing Revolution, Lavery Pennell, 2degrees, Institute for Manufacturing, 2013.
24
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
The average manufacturer now spends five times more on nonlabour costs than on labour costs. It is here that efforts to improve
productivity should be focused.11
The benefits of realising such productivity gains are numerous.
UK carbon emissions could be dramatically reduced through both
decreased demand for energy and raw materials compared to current
levels, and through creating less pollution during industrial processes.
A reduction in resource requirements, or the substitution of less-scarce
resources into the production process, would make UK manufacturing
more resilient against future barriers to availability of resources. This
includes price volatility and supply-shocks arising, for instance, from
geopolitical turmoil, climate change-related extreme weather events or
restricted access to rare materials on the basis of national competition.
UK manufacturing also has the opportunity to gain significant
competitive advantages through efficiency gains and transformations
within existing sectors, developing new green industries and innovative
business models, and fostering economy-wide transitions which are
complementary to ‘greener’ modes of production.12 Analysis of patterns
of green innovation shows that there are also opportunities for the UK
to shift its comparative advantage13 within certain industries if it is able
to solve sustainability-related challenges better than its competitors.14
Competitiveness is a legitimate concern for public policy, without
resorting to a crude understanding of global competition where every
export is counted as a win and every import a loss. German-made
solar panels are likely to work much the same as British-made ones.
However, persistent current account deficits tend to have pernicious
consequences,15 and resource scarcity promises to exacerbate this.
Manufacturing also employs some 2.5 million workers (as well as many
more employed indirectly), who out-perform the general economy in
terms of productivity and wages. Hence, there is a strong economic
case, as well as an environmental one, for government to take an
interest in the transformation of existing manufacturing activities and
the emergence of new ones.
11Baptist and Hepburn explore the relationship between intermediate inputs (of which materials are a considerable part) and economic growth.
Our focus on measuring value - added – the value of output minus intermediate inputs such as materials and energy – in national accounts
tends to obscure the potential of material efficiency gains to drive productivity. Looking instead at gross output, they find that firms that use
intermediate inputs less intensively tend to have higher total-factor productivity (the residual impacts on output which are not accounted for
by measured changes in the input of labour or capital). Baptist, S and Hepburn, C; “Intermediate Inputs and Economic Productivity”; Working
Paper 94, Grantham Research Institute on Climate Change and the Environment; 2012.
12Fankhauser, S et al, “Who will win the Green Race? In search of Environmental Competitiveness and Innovation”, Global Environmental
Change, 23, 2013.
13 i.e. what countries specialise in for trade.
14Fankhauser, S et al, “Who will win the Green Race? In search of Environmental Competitiveness and Innovation”, Global Environmental
Change, 23, 2013.
15 Wolf, M; The Shifts and the Shocks, 2014.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Decoupling
What is needed is termed a decoupling of economic growth
from environmental impacts. More specifically, relative
decoupling means a decrease in the material/energy intensity
of each unit of output, so that raw material and energy use
increase at a slower rate than economic growth. Absolute
decoupling requires that the trend lines of output and
environmental impact move in opposite directions; that we
are able to produce more with less in absolute terms.
Relative decoupling in material usage appears to be occurring
on a global scale, with 50% more value being extracted per
unit of material than in 1990. However, faster economic
growth over this period has meant a significant rise in total
material resource use, with global consumption surpassing
70 billion metric tonnes annually. This represents twice the
level of extraction from the natural environment compared to
1980, and equates to around 46kg of consumption per person
per day in advanced countries.16 With anticipated population
increases and economic growth, the United Nations
Environment Programme (UNEP) predicts that without
significant decoupling, global consumption of key material
resources will be three times current levels by 2050.17
Analysis of domestic material requirements versus GDP
can be problematic. Absolute decoupling at a national
level, as appears to be happening in the UK for materials18
and carbon,19 could equally be facilitated by outsourcing
of production as by improvements in efficiency. Changes
in aggregate material use and carbon emissions for the
UK need to be viewed within the context of changes to the
make-up of the economy in recent decades; specifically the
fall in manufacturing’s share of GDP from around 22% in
1990 to around 11% today.20 Similarly, significant ‘onshoring’
of production from overseas, or the emergence of new
industries on a significant scale, could lead to an increase in
these absolute numbers, while still being a net positive for
the global environment as a whole. Policy-makers need to
consider not only the UK’s production emissions, but also its
consumption emissions. While the former have fallen, the
latter are still at 1990 levels and were trending upwards
prior to 2007.21
16 OECD, Material Resources, Productivity and the Environment, 2015, 9.
17 UNEP, Decoupling Natural Resource Use and Environmental Impacts from Economic Growth, 2011.
18 DEFRA, Resource Management; a Catalyst for Growth and Productivity, 2015, 10.
19Martin, R et al, Energy and the Environment: a cold climate for climate change policies? Centre for Economic Performance, 2015, 3.
20 BIS, Manufacturing in the UK, 2010, 2.
21 Martin, R et al, Energy and the Environment: a cold climate for climate change policies? Centre for Economic Performance, 2015, 4.
25
26
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
ABSOLUTE VS RELATIVE DECOUPLING
200
ECONOMIC ACTIVITY (GDP)
150
RELATIVE DECOUPLING
100
TIME
ENVIRONMENTAL IMPACT (GDP)
ABSOLUTE DECOUPLING
50
INDEX
Fig. 5 “Absolute Vs Relative Decoupling”, Source: Adapted from adapted from European Environment Agency;
www.eea.europa.eu/publications/environmental-indicator-report-2012/environmental-indicator-report-2012-ecosystem/part1.xhtm
Moving toward Sustainability
The extent of the savings possible through efficiency measures
differs across sectors. Energy-intensive industries, and those dealing
in high volumes of materials, naturally have a much greater focus
on such savings than the typical manufacturer. For instance, energy
and material efficiency have historically been major concerns within
the steel industry. The manufacturing sector as a whole has also
been responsive to price changes, such as the increases in energy
prices from 2002 which provided the background for considerable
year-on-year improvements in energy intensity within industries
like chemicals and automobiles.22
Yet in many industries, the largest determinant of efficiency
improvements seems to be leadership and knowledge, rather than
technical possibilities. The divergence in company performance
within sectors is enormous – for instance, Toyota UK’s cumulative
reductions in energy use of 70% since 1993, compared to other
automobile manufacturers which have achieved less than 10% over
the same period.23
The attention directed toward the efficient use of energy and
materials in any company is naturally linked to how much those
inputs account for as a proportion of total costs. While energyintensive industries (EIIs) account for two thirds of the UK’s
industrial carbon emissions and half of the sector’s energy use,24
22 Lavery, G et al, Next Manufacturing Revolution, Lavery Pennell, 2degrees, Institute for Manufacturing, 2013, 22.
23Ibid
24 Trade Union Congress (TUC), Building our Low-Carbon Industries, 2012, 3.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
the remainder is due to non-intensive sectors, for which energy
costs often amount to 5% or less of total costs.25 For EIIs, even small
incremental efficiency improvements will have a significant impact
on emissions and energy/resource use, due to the volume of inputs
and externalities involved in these processes. For non-EIIs, evidence
suggests that the average firm is far from the efficiency frontier, and
that unrealised, cost-effective gains across the manufacturing sector
add up to a significant share of the sector’s impact in aggregate.
Closing the efficiency gap between the best and worst performers is
crucial, but sustainability within the industrial sector also requires
that the frontier of what is possible be advanced through fostering
innovation and the diffusion of knowledge throughout the system.
This is particularly important for sectors that have already made
significant gains in efficiency or whose emissions are substantially
determined by the chemical reactions inherent in their processes
(e.g. lime).26 These industries will require new forms of technology
(such as carbon capture and storage [CCS]) to meet the targets for
emissions reduction set by the UK Climate Change Act.
A consistent and effective price on carbon and other externalities
is an important aspect of incentivising sustainable transformation
and levelling the playing field for greener alternatives. Yet such
an approach on its own is not sufficient to overcome behavioural,
organisational and informational barriers which already exist
to more sustainable ways of doing business.27 Additionally,
decarbonisation of the energy grid is important not just from the
perspective of carbon emissions generated through industrial use
of electricity, but because of its potential to allow the electrification
of heat generation for some industrial processes,28 as well as sectors
such as transport.
It is, however, unclear that efficiency and technological innovation
alone will be sufficient drivers for industrial sustainability. This
is partly explained by the rebound effect, or the so-called Jevon’s
paradox: advances in efficiency reduce prices, and increase
consumer demand for a product, thereby undoing any reduction
in total energy or resource use.29 Any analysis of industrial
sustainability would be incomplete without considering change on a
system-level; of how society makes use of physical products, and the
ways in which society’s desired outcomes can be met through ways
which are less damaging environmentally.
25 DECC, Energy Efficiency Opportunity in the UK, 2012, 19.
26Orion Innovations UK ltd, Walking the carbon tightrope: Energy intensive industries in a carbon constrained world, report prepared for TUC,
2014, 44.
27 Fankhauser, S, “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 12.
28Such as in the paper and pulp, and food and drink sectors. BIS/DECC Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050;
Cross-Sector Summary, 2015.
29 Allwood, J et al, “Material efficiency: providing material services with less material production”, 7.
27
28
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Examples of this line of thinking include:
•Better systems of reuse, remanufacturing, refurbishment
and recycling;
•Better utilisation of waste;
•Product design for durability, easier repair and recovery of
materials after use;
•Synergetic business relationships making better use of
by-products and waste energy (industrial symbiosis);
•Circular economy models30 which keep materials within the
system of production and use, rather than discarding them;
•Innovative business models which deliver outcomes to
consumers through means other than product ownership.
Such approaches face an inherent difficulty in trying to fit in to an
existing system which has developed around the traditional, linear
model of manufacturing. Evidence abounds that such models can
deliver substantial economic and environmental benefits.31 However
no business operates in a vacuum, and new ways of doing things can
often run contrary to established supply networks, infrastructure
and consumer expectations. The question of how policy should
seek to promote such measures within a complex system is far from
straight-forward – yet it is an area which policy-makers can illafford to ignore.
The Role of Policy
The policy objectives which arise out of these observations require
a multipronged approach: addressing barriers to wider adoption
of known efficiency measures while also fostering an economic
and social environment which is conducive to innovation,
experimentation, new collaborative relationships and new, more
sustainable ways of doing things. This report addresses this
challenge through five key areas of focus for policymakers, which
comprise the five core chapters of the report:
•Leadership;
•Resilience;
•Innovation;
•Collaboration; and
•System change
Although policy tools and approaches will be dealt with in greater
detail in each of these sections, there are a number of core principles
which ought to guide public policy formation in all of these areas:
1.
olicy should be consistent as to its end, but flexible as to
P
its means: Clear, consistent policy, backed by a credible and
shared commitment amongst policy-makers to the end goal
of sustainability, can provide certainty for private actors
and encourage investment in efficiency measures and green
30http://www.ellenmacarthurfoundation.org/circular-economy; RSA – The Great Recovery Project, Investigating the Role of Design in the Circular
Economy, 2013.
31McKinsey and Company/Ellen MacArthur Foundation, Towards the Circular Economy: Accelerating the scale-up across global supply chains,
2014; Preston, F, A Global Redesign? Shaping the Circular Economy, Chatham House, 2012.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
innovation. However, the impact and interaction of different
policy mixes is not always easy to predict in advance, and
it should be taken as given that there will be unintended
consequences accompanying policy measures. Government
should therefore be unequivocal in its commitment to
fostering a transition to a sustainable industrial economy,
while also being flexible and reflective toward the measures it
uses to help achieve this.
2.
olicy should be coordinated: Sufficient market barriers to
P
sustainability already exist without government adding to
the challenge by having different spheres of policy working
against one another. The division of policy-making functions
and decentralisation of decision-making can allow for the
development of specialised expertise and deeper linkages
between public and private sector actors at the local level.
A decentralised, more active policy approach to fostering
sustainability also requires the development of policy-making
capacity at all levels.32 However, policy-making which is
compartmentalised, both in focus and in structure, is likely to
be an inadequate partner for the system-level change that is
required for a sustainable industrial sector.
3.Policy should be conscious of the global dimension: The
global nature of large sections of economic activity poses a
significant challenge to policy-making at a national level. A
policy approach which simply forces production elsewhere
is counterproductive to environmental objectives (not
to mention social and economic ones), particularly if the
destination country imposes lower environmental standards
than the UK. Carbon emissions and wasteful use of resources
are no less damaging to the global system when they occur on
the other side of the world. It is, however, easy to overstate
the threat of ‘carbon leakage’, which in practice is likely to
only apply to firms which have high decarbonisation costs in
relation to output, and which face global competition.33 For
these industries in particular, the alignment of imposed costs
and transitional support – at the EU level at least, if not the
global should be a central consideration.
These principles presuppose that there is a role for government in
shaping the outcomes of the market. Economic theory provides a
number of arguments (and counter-arguments) to what can broadly
be termed ‘industrial policy’, which underpin the analysis in this
report, and are worth expounding from the outset.
32 Mazzucato, M, A mission-oriented approach to building the entrepreneurial state, Innovate UK, 2014, 17.
33 Fankhauser, S, “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 11.
29
30
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Economic Theory –
Industrial Policy
It is hard to overstate the contribution of industrialisation to the
level of material wellbeing now enjoyed by developed nations.
Little wonder then that industry – its formation, expansion and
retention within national boundaries – has been an issue of national
importance and a focus for policy-makers as far back as Robert
Walpole (Prime Minister 1721 – 1742) in the UK and Alexander
Hamilton (Treasury Secretary 1789 – 1795) in the USA. For these
leaders, and many others who sought to replicate the productive
potential of the industrial revolution, industrial policy was seen as
the ladder by which they, like the UK, would ‘[attain] the summit of
greatness”.34
A brief look at the economic importance of manufacturing
illustrates why it has traditionally been central to the objectives of
national policy around the world. Very few nations have reached
‘developed’ status other than through industrialisation – moving
their workforce from farms and into factories.35 Manufacturing
has historically been the primary source of productivity gains
for economies, and a key generator of new technologies and
organisational forms, including those which have had significant
benefits to other sectors of the economy.36 Manufacturing is also
intrinsically important for trade, as opposed to many service sector
industries which require face-to face interaction and therefore
do not easily cross national borders (haircuts being the classic
example).
Modern connotations of industrial policy are much different,
typically bringing to mind images of inefficient interventionism
during the 1960s and 1970s: governments ‘picking winners’ through
poorly targeted subsidies, and failed attempts to foster high-tech
industries in the UK.37 Alongside scepticism of the government’s
ability to improve on outcomes produced by market forces were
concerns of ‘regulatory capture’. This is the fear of policy decisions
being based not on dispassionate assessments of national economic
interests, but on interest-groups’ ability to successfully lobby policymakers. It was such concerns that underpinned the supply-side
revolutions of the 1980s onward; specifically, the phasing out of
subsidies and import protection, the deregulation of large parts
of the economy, and pro-competition policies.38 To the extent that
government sought to promote manufacturing, it was through
‘horizontal’ means – such as education, national infrastructure
34In the words of Prussian economic theorist Friedrich List, The National System of Political Economy, 1841.
35Rodrik, D; ‘No more Growth Miracles’, Project Syndicate, 2012, available at http://www.project-syndicate.org/commentary/no-more-growthmiracles-by-dani-rodrik .
36This includes agricultural machinery and pesticides, or inventory management techniques in retail stores - Chang, H Andreoni, A and Kuan, M;
“International Industrial Policy Experiences and the Lessons for the UK”, 2013, 11.
37 Crafts, N; “Creating Competitive Advantage: Policy Lessons from History”, 2012, 8.
38 Crafts, N; “Creating Competitive Advantage: Policy Lessons from History”, 2012, 9.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
and support for science and innovation – rather than ‘selective’
assistance to individual sectors or firms.
Yet on some accounts, industrial policy in some form is inevitable.
Chang, Andreoni and Kuan define it as “a policy that deliberately
favours particular industries/sectors (or even firms) over others,
against market signals, usually…to enhance efficiency and
promote productivity growth, for the whole economy as well as
for the targeting industries themselves”.39 Policy decisions such
as the relative emphasis and funding between subjects within the
education system, or where we invest in infrastructure and what
type, can never be neutral between sectors of the economy which
have such diverse requirements for these goods.
Such an understanding cuts across the horizontal/selective
distinction, and has much in common with Karl Polanyi’s
understanding of markets as being constituted by states. What we
might understand as the outcome of individual economic agents
contracting with one another within a free market is, in fact,
inevitably shaped by the boundaries which society has set for the
market, and which are often taken for granted.
The challenges of the future that make a transition towards a
sustainable industrial sector necessary, will not be met without the
thoughtful application of a mix of policy mechanisms. This might
involve relying primarily on the power of market competition
in some areas while facilitating greater collaboration between
competitors in others; coordinating consortia of different groups
and organisations to look at the future resource needs of UK
manufacturing, and how the economy as a whole can become
more resilient to future shifts; or government working together
with industry to help the development and diffusion of new, more
sustainable ways of doing things. The state will have to take a
more active role, while also being mindful that the existence of a
market failure does not always imply a clear-cut and obvious policy
intervention as a correction.
Justifications for Industrial Policy
The theoretical justifications for industrial policy are diverse
and have varied in their prominence over time. At the root of the
classical arguments for government intervention is the idea of
market failure, which suggests that for all its productive potential,
there are areas where the market does not work well. This includes
a tendency to over- or under-produce certain goods in a way which
is not ideal for society, or instances where players in the market
lack the capability to coordinate, overcome risk or uncertainty, or
take full advantage of areas of potential gain. This opens the door
for policy to correct this failure in a way which allows society as a
whole to benefit. Market failure theory is fundamental to much of
what government does with regards to environmental regulations,
funding research & development (R&D), building infrastructure and
the provision of social services.
39Chang, H Andreoni, A and Kuan, M; “International Industrial Policy Experiences and the Lessons for the UK”, 2013, 9.
31
32
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
The most obvious form of market failure is that of externalities, the
consequences of an economic activity which are shared or borne by
society as a whole, not just those who generate them, and which are
not reflected in the market price. Pollution from industrial processes
is an obvious example of a negative externality. As the cost of
pollution is imposed on society as a whole, and only partially falls
on the party responsible for it, the market will tend to produce more
than it would if the cost was solely borne by that producer. On a
global scale, the same logic applies to climate change caused by the
emission of greenhouse gasses, which the Stern Review described as
a “market failure on the greatest scale the world has seen”.40
Externalities can also be positive, such as knowledge from private
R&D and skills training which ‘spill over’ into other sectors – these
the market will tend to under-produce, because the producer does
not capture the full benefit of his or her actions. New innovations
have the potential to bring widespread benefits that are shared
by society as a whole, meaning there is a good argument for
governments to support greater R&D in cleaner technologies. A
related concept to positive externalities is that of public goods,
which everyone in society benefits from, but which no one is able
to exclude others from. In such cases, individuals will have the
incentive to ‘free-ride’ on others’ efforts to provide or maintain
this good, which will therefore tend to be under-provided. A clean
environment, educated work force and basic research are all
examples of public goods, which the state takes a significant role in
providing beyond what would otherwise occur through the market.
Beyond Market Failures
While the classical arguments for addressing market failures
underpin many ‘horizontal’ policy measures, which are often noncontroversial, industrial policy which is more explicitly ‘selective’
relies on more complex systems-based accounts of innovation,
diffusion and coordination. This approach focuses not just on actors
within the economy, but also on the connections between them
and the institutions (rules and norms) under which they operate.41
Government inevitably plays a significant role in this system, and
market failure theory on its own is an inadequate guide to the ways
in which policy can influence the effective development, diffusion
and utilisation of knowledge which might contribute to a more
sustainable industrial system.
For instance, Mariana Mazzucato of the University of Sussex argues
that while market failure theory is adequate for guiding policy
which aims to ‘patch-up’ imperfections in already-existing market
trajectories, “it is less useful when policy is needed to dynamically
create and shape new markets”.42 This is particularly true for new
technologies where there are high levels of risk and which require
investment at a high level of capital intensity, something even
venture capital has been unwilling to fund at sufficient levels.
40 Stern, N; Stern Review: The Economics of Climate Change, 2006, 25.
41 Crafts, N and Hughes, A; “Industrial Policy for the medium to long-term”, 2013, 8.
42Mazzucato, M “Beyond Market Failures: Shaping and Creating Markets for Innovation-Led Growth” in Mission Oriented Finance for Innovation,
Policy Network, 2015, 149.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
Transformative technologies such as the internet often take 15-20
years to mature to the stage of creating new industries. This level
of patient funding is only likely to come from an infrastructure of
supportive public institutions, interlinked with a strong network
of private sector investors to capitalise on breakthroughs once the
technology reaches the stage of commercialisation.43 As Mazzucato
has demonstrated, “every technology that makes the iPhone a
‘smart’ phone, was indeed picked and funded by government”,
including GPS, LCD displays and touchscreen technology.44
Yet the barriers to change are not just technological, but also
behavioural and systemic. System failures can occur to inhibit
shifts to new sustainable business models which require
the reorganisation of infrastructure or the development of
collaborations with new and unfamiliar partners. The diffusion
of knowledge throughout the system can be undermined by weak
connections between firms and other entities, and by the ability
of different firms to absorb and take advantage of new sustainable
approaches to production.45
The ‘Varieties of Capitalism’ approach classifies the UK as
a Liberal Market Economy (LME), characterised by certain
complementary, interlinking institutions around corporate
governance, education and training systems, inter-firm
collaboration and labour markets. This approach suggests that
such models tend toward more general and transferrable skills,
market-based relationships and radical innovation, compared
to the more coordinated alternative (Coordinated Market
Economy [CME]), of which Germany is the archetypal case.46
Many of the short-comings identified with LMEs – excessive
short-termism in corporate decision-making and the
provision of finance, a tendency not to incentivise long-term
investment in sector-specific skills – are also likely to pose
obstacles to the transition to a sustainable industrial system.
These existing institutional structures, which are the result of
many decades of cumulative interactions and policy decisions,
naturally form the context of any future policy decisions. Yet
such institutions should not be taken as given, and a key area
of focus is the role of policy in facilitating a deep network
of linkages between state, industry and ‘intermediate’
institutions (such as trade associations, unions and research/
educational institutes).47
43Majumdar, A, “Why We Need Public Endowments For Transformative Research”, in Mission Oriented Finance for Innovation, Policy Network,
2015, 60.
44Mazzucato, M, The Entrepreneurial State, 2013
45 Crafts, N and Hughes, A; “Industrial Policy for the medium to long-term”, 2013, 15.
46 Hall, P and Soskice, D; “An Introduction to Varieties of Capitalism”, in Varieties of Capitalism, 2001.
47 Chang, H Andreoni, A and Kuan, M; “International Industrial Policy Experiences and the Lessons for the UK”, 2013, 15.
33
34
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
How should Industrial Policy be approached?
Although there is a strong theoretical argument for industrial policy,
this does not mean that the design and implementation of that
policy is always obvious or unproblematic. Much policy literature
focuses on the many mechanisms which government might use
to shape market outcomes, but equally important, according to
Harvard economist Dani Rodrik, is the process through which
such policies are formed. While its role in addressing market
and system failures is often indispensable, government often
has worse information than the private sector as to the source
of market imperfections. It is therefore important that policy be
formulated within an ongoing process of learning, exploration and
reassessment between the public and private sector. This approach
is termed ‘embedded autonomy’, in which the flow of information
into the policy-making process is facilitated by a broad network of
private sector linkages, while at the same time ensuring that the
state remains focused not on the particular interests of these private
sector entities, but on the social objectives which will not be met by
market outcomes alone.48
Government must also provide a clear direction for the formation
of policy and for collaborative innovation. A sustainable industrial
system should be a clearly articulated challenge for the sector
as a whole to meet, both in terms of taking advantage of the
opportunities for new and disruptive ways of meeting human
needs, and of building resilience against future challenges related to
sustainability.
A similar clarity must underpin the formulation of policy. Carlotta
Perez of the London School of Economics argues that technological
advances provide the potential for transformation, but the direction
of that transformation is not predetermined. The state’s role is
to help grasp the rapidly rising opportunity within industrial
sustainability, to shape market conditions in such a way as to enable
investment opportunities in the direction of sustainability, and to
foster the emergence of complementary industries, supply chains,
skilled workers and consumers that reinforce this transformation.49
48 Rodrik, D; “Industrial Policy for the 21st century”, 2004.
49Perez, C; “Steering Economies toward the next Golden Age”, in Mission-Oriented Finance for Innovation, Policy Network, 2015, 54.
Industrial Evolution - Making British Manufacturing Sustainable
Introduction
1
LEADERSHIP
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
The assertion that there are costless or
near-costless measures50 to improve energy
and resource efficiency that have not been adopted
by UK business seems rather odd from the
perspective of neo-classical economics.
If these measures are worth doing,
wouldn’t they have been done long ago?
Yet firm-level performance on labour productivity varies wildly
beyond what would be explained by levels of capital investment,
and the evidence suggests that management practices account
for a significant proportion of this.51 As discussed previously, it
appears that the efficiency with which companies use energy and
resources is equally divergent – a gap which carries with it far
greater implications from a sustainability perspective. Hence, there
is good reason for policy-makers to consider how behavioural and
organisational barriers to the wider incorporation of sustainability
into business practices might be overcome.
Why would self-interested business not take up efficiency
measures which economic analysis suggests ought rationally to be
undertaken? The most straight-forward answer to this questions is
that economic decisions are (generally) not made by computers, but
by humans who are enmeshed in a complex array of institutions,
social connections and organisational hierarchies that shape and
constraint their decision-making. Additionally, and as behavioural
economist Daniel Kahneman has demonstrated, there is a myriad
of ways in which we are not perfectly logical creatures at the best
of times, and frequently make decisions influenced by split-second
impressions, excessive aversion to loss and cognitive bias. In this
context, the collective failure to realise efficiency savings becomes
somewhat more comprehensible.52
50As is suggested by numerous cost curve analyses; for example tern, N; The Stern Review: The Economics of Climate Change, 2006; IEA;
Summing up the Parts, 2011 and DECC, Energy Efficiency Opportunity in the UK, 2012.
51Bloom, N and Van Reenen, J, “Why do management practices differ across firms and countries?” Journal of Economic Perspectives, 24: 1,
Winter 2010, 203–224.
52 Kahneman, D, Thinking Fast and Slow, 2011.
37
38
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
The POLFREE project (Policy Options for a Resource Efficient
Economy) suggests that businesses’ progress on efficiency is
hampered by a ‘web of constraints’ which includes inter-linking
institutional, market, organisational, behavioural and technological
barriers.53 Policy-makers are understandably more comfortable
dealing with factors external to the firm, rather than internal.
However, it remains true that the most effective way of addressing
the challenges of sustainability is for companies to internalise
those challenges as part of their day-to-day business and long-term
strategic planning.
ohnson Tiles is a ceramics company founded in StokeJ
on-Trent in 1901. Its floor and wall tiles contain recycled
ceramic waste collected from other local manufacturers.
This recycling system results in approximately 20, 000
tonnes of waste being saved from landfill every year,
and has also allowed the company to make significant
savings in terms of energy and water usage and carbon
emissions. Their broader approach to sustainability includes
working with suppliers to ensure they are minimising
their environmental impacts, switching to inkjet printing
and investing in new kilns to reduce flue gas emissions.54
The characteristics of Johnson Tiles’ approach, including
a top-down emphasis on the benefits of sustainability
and commitment to ongoing improvements year on year,
should be highlighted and championed across the wider
manufacturing sector.
Knowledge Gap
A number of submissions to this inquiry identified a gap in
management awareness of the benefits of energy and material
efficiency. While information on these is often freely available,
this does not mean it is readily accessible and implementable for
all companies equally. A key insight into this puzzle of unrealised
efficiency gains is that measures which may seem costless – either
in terms of net present value (NPV), or in a literal sense, such as
shutting down machinery when not in use – are not costless from
the perspective of management time and attention. Management
‘bandwidth’ is a scarce resource and sustainability measures are
competing internally with other projects or courses of action in a
way which is not purely based on economic returns.
53 Bastein, T. et al, Business Barriers to the uptake of Resource Efficiency Measures, POLFREE, 2014.
54http://www.efficientenergy.net/n/102613.htm
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
39
Survey evidence from EEF suggests that over half of UK
manufacturers have not considered remanufacturing, while a
third have not considered selling services as well as products.
Among those that have considered such measures, the uptake is
remarkably high, with relatively few companies reporting that they
had considered but rejected these approaches. There is also a clear
pattern of smaller companies being less likely to engage in these
practices.55
PERCENTAGE OF MANUFACTURERS WHO
HAVE CONSIDERED REMANUFACTURING
ELECTRICAL & OPTICAL
11
22
56
HAVE DONE
11
CONSIDERED BUT REJECTED
METALS
11
MACHINERY
7
25
64
5
7
5
60
CONSIDERING IN NEXT 12M
NOT CONSIDERED
5
CONSIDERING BEYOND 12M
OTHER MANUFACTURING
32
RUBBER & CHEMICALS
33
4
56
8
TRANSPORT
10
20
10
30
DONE ALL THAT IS EFFECTIVE
58
50
0
8
40
10
50
60
10
70
20
80
90
100
PERCENTAGE OF MANUFACTURERS WHO HAVE CONSIDERED
OFFERING SERVICES TO PROLONG PRODUCT LIFE
ELECTRICAL & OPTICAL
46
8
8
31
HAVE DONE
8
CONSIDERED BUT REJECTED
METALS
27
3
MACHINERY
7
43
45
20
20
CONSIDERING IN NEXT 12M
30
NOT CONSIDERED
5
CONSIDERING BEYOND 12M
OTHER MANUFACTURING
32
4
RUBBER & CHEMICALS
39
TRANSPORT
40
0
10
20
4
4
40
8
31
10
30
40
16
23
40
50
60
DONE ALL THAT IS EFFECTIVE
70
10
80
90
100
Fig. 6 Source: Adapted from Baker, S, “Systems Innovation In Industry: Trends Across Sectors”, presentation to Conference of the
Centre for Industrial Sustainability , July 2015
55Electrical and Optical manufacturers are one exception to the high uptake of remanufacturing, with 22% having considered but rejected the
option. Baker, S, Systems Innovation In Industry: Trends Across Sectors, presentation to Conference of the Centre for Industrial Sustainability ,
July 2015.
40
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
Special attention is warranted to the particular barriers small
and medium enterprises (SMEs) face with regards to awareness
of sustainable modes of manufacturing. Such businesses can face
pressure from larger entities within their supply chain (often
concerned with the overall environmental footprint of their
products) to make improvements on environmental measures.
Yet SMEs often lack the internal skills to take advantage of
opportunities outside of their core business, or the scale to make
external assistance (for instance, through a consultant) worthwhile.
Schumpeter’s theory of ‘creative destruction’ may have been correct
in assuming that radical change would come from smaller, more
nimble new entrants to an industry; however, many established
smaller firms seem to find experimentation and innovation difficult
when it comes to sustainability.
The EU-funded PrISM programme worked with 120 SMEs in the
East of England between 2012 and 2015 and observed both a lack
of appreciation for the potential economic benefits of incremental
efficiency gains, and an acute sensitivity to upfront costs. A modest
grant to fund electricity monitoring technology for 20 of these
companies paid back within 6 months on average through cost
savings and, more importantly, seems to have triggered an ongoing
commitment amongst many of the companies involved to continue
to improve efficiency under their own steam, once the benefits of
sustainability were evident to them.56
56Practical and Innovative Solutions for Manufacturing Sustainability (PrISM); Athanassopoulou, N ”Reducing costs and carbon footprints:
PrISMS case studies from SMEs”, Presentation to Conference of the Centre for Industrial Sustainability, July 2015.
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
41
Leadership amongst UK Managers
What can analysis of the leadership capabilities
of UK managers tell us about how policy should
look to promote sustainability? The World
Management Survey (WMS) found that the UK
ranked mid-table in a cross-country assessment
of management practices – ahead of developing
economies and southern Europe but lagging
behind the US, Germany, Japan, Canada and
Sweden.57 Its analysis of factors that tend to
influence management performance emphasises
that:
- Skills are crucial for managers and nonmanagers alike: the UK rates particularly
poorly in this area, with a clear shortage of
degree-holders in both categories;
- Market competition is associated with
better management practices: this seems
particularly true of global competition,
where multi-national corporations generally
outperform domestic firms.
- Firm ownership: Private equity-owned
companies outperform family- and
government-owned firms. Founder/CEO
firms tend to be the worst performing on
average, suggesting that there is a shift in the
required management skills as companies
move from being a start-up to a medium size
business.58
However, it is worth questioning whether the
qualities of good management measured by
the WMS overlap entirely with those which
are required from the perspective of a more
sustainable industrial sector. While greater
management competencies might improve
economic productivity, it is not clear that this
will result in better environmental outcomes; for
instance, if capital is used more intensively and
energy and resource use increases. Thankfully,
economist Nick Bloom and others found that good
management practices are strongly associated
with less energy- and material-intensive
production processes, while still being more
productive overall.60 This connection could be
reinforced by ensuring that sustainability is
entrenched in educational programmes which
are likely to be of relevance to managers within
manufacturing, particularly engineering and
business degrees.
Many of the good management practices
emphasised in the WMS are likely to be important
to a more sustainable industrial system –
awareness and ability to adapt to new practices,
long-term strategic thinking, and effective targets
and tracking of performance.59
57World Management Survey, “Manufacturing Report: 2011”; http://
worldmanagementsurvey.org/wp-content/images/2011/11/WMS_
report2011_mfg_ENGLISH.pdf
58The minimum number of employees for companies in the sample
was 100. Homkes, R, What role will leadership play in driving the
future of UK manufacturing?, 2014.
59Homkes, R; “What role will leadership play in driving the future of
UK manufacturing?”, 2014, 37.
60Bloom, N el al, “Modern Management: Good for the Environment
or Just Hot Air?”, The Economic Journal, 120, 2010.
42
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
Uncertainty and Organisational Barriers
It has been observed that energy efficiency measures often require high rates of
return before businesses will invest in them, relative to other projects – which
has been termed the ‘energy efficiency paradox’.61 ‘Bounded rationality’ – the
limitations on resources available for accessing and interpreting information
– is commonly cited as a barrier for such measures not being undertaken.
Additionally, ‘hidden costs’ such as disruptions to production or staff time required
to implement a measure, are felt to undermine the economic case for efficiency
improvements.62 Uncertainty can be exacerbated by factors external to the firm,
including macro-economic conditions, policy fluctuations and the maturity of the
technology involved in a project. Yet even accounting for these factors, it seems
that many measures with high rates of return or little or no cost are not utilised63
and the development of greater skills in this area appears to suffer from an
assumption that the resulting solutions will be capital intensive.
The high hurdle rates businesses impose on efficiency measures in deciding
whether to make an investment seem at best tentatively-connected to objective
economic calculations. Rather than accurately reflecting the cost of capital and
the perceived risk of a project, hurdle rates and payback periods64 also act as
means to structure firm decision-making within large complex organisations, or
as useful ‘rules of thumb’ for organisations with fewer resources.65 Furthermore,
assessments of profitability (such as based on NPV) tend to occur once the
proposal already has support, rather than being information on hand from the
outset, meaning that there also needs to be a focus on how sustainability measures
are championed and communicated within the firm.66
The structure of the firm appears to play a significant role in whether a company
makes sustainability a priority. Energy efficiency tends to be the responsibility
of middle, rather than senior management. This means that sustainability is less
likely to be a key consideration in the strategic direction of the company, and also
that senior management are less likely to be aware of the extent of the potential
gains from efficiency measures.67 A structure whereby the energy or efficiency
manager is situated close to the Chief Executive Officer (CEO) in the organisation’s
hierarchy seems to be important in the implementation of sustainability measures.
Yet the effectiveness of that communication is also likely to be fundamental to the
decision-making process, which may open opportunities for policy to assist the
relevant managers to make good business cases within their own organisations.
Many companies which are recognised as leaders in sustainability have had a
strong sustainability philosophy implemented from the top down – which can help
generate a firm-wide focus on incremental efficiency gains, and ideas arising from
the shop floor.
61 DECC, What are the factors influencing energy behaviours and decision-making in the non-domestic sector?, 2012, 7.
62Baruah, P et al, ”Firm Level Perspective of Energy Efficiency Barriers and Drivers in UK Industry – Indications from an Online Survey”, BEHAVE
Energy Conference, 2014.
63 Cooremans, C, “Investment in Energy Efficiency: Do the Characteristics of Investment Matter?”, 2012.
64Hurdle rates are the required rate of return on an investment: pay-back periods are the period of time in which the upfront cost of an investment
is recouped from its returns.
65 Cooremans, C, “Investment in Energy Efficiency: Do the Characteristics of Investment Matter?”, 2012.
66 DECC, “What are the Factors influencing energy behaviours and decision-making in the non-domestic sector?”, 2012, 23.
67 DECC, “What are the Factors influencing energy behaviours and decision-making in the non-domestic sector?”, 2012, 20.
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
Short-termism
A lack of long-term focus among businesses also seems to be a factor stymying
sustainability measures. Pay-back periods of no more than two years on
investments seem to be common, which excludes many efficiency and low-carbon
investments which might have returns which are more heavily back-loaded. Such
investments are sensitive to changes in discount rates – the extent to which current
benefits are preferred over future benefits, and future values are ‘discounted’ over
time to reflect this deferred gratification. Andy Haldane of the Bank of England
has noted what seems to be excessively myopic focus on the part of investors
and executives, which results in ‘rational’ investments not going ahead. A 2005
survey of executives found that shareholder expectations would drive them to
reject a profitable (positive-NPV) investment which would lower quarterly profits
below what was anticipated, while a 2011 PwC survey of FTSE-100 and FTSE250 executives found a majority would prefer a £250,000 return tomorrow to a
£450,000 return in 3 years’ time.68 This inclination has very broad implications
for long-term economic performance, but from a sustainability point of view, the
concern must be that so-called ‘quarterly capitalism’ is leading to economically,
socially and environmentally beneficial proposals being tossed in the rubbish bin.
Is there a clear explanation for this short-termism which might guide policymaking on industrial sustainability? Submissions to the inquiry reported a greater
degree of risk aversion amongst manufacturing businesses due to an uncertain
economic climate, though this risk aversion was also identified as an issue over
the longer-term due to offshoring and the diminishing weight of manufacturing in
the economy. This is consistent with Haldane’s findings of a shift to a statistically
significant level of short-termism within the UK manufacturing sector from the
mid-1980s to mid-1990s.69
Much attention has been focused on the rise of the finance sector at the expense
of the real economy within developed nations, usually with reference to the
financial sector’s shift toward trading within itself and lending for asset purchases
rather than business expansion.70 However, the underappreciated aspect of this
‘financialisation’ is what has happened within the real economy itself. Anglo-Saxon
liberal market economies that have increasingly prioritised the philosophy of
‘maximising shareholder value’ have tended to perform poorly with regards to
patient reinvestment of profits, nurturing of skills and incremental innovation.71
The prevalence of corporate share buy-backs, designed to boost share prices, at the
expense of long-term investment amounts to firms ‘eating themselves’, according
to a recent interview with Haldane.72
68Haldane, A and Davies R; “The Short Long”, Speech, May 2011, http://www.bankofengland.co.uk/archive/Documents/historicpubs/
speeches/2011/speech495.pdf
69 Haldane, A and Davies R; “The Short Long”, 2011.
70Turner, A, “The Social Value of Finance: Problems and Solutions”, in Mission-Oriented Finance for Innovation, Policy Network, 2015.
71 Lazonick, W and O’Sullivan, M “Maximising Shareholder Value: a New Ideology for Corporate Governance”, Economy and Society, 29:1, 2000.
72http://www.theguardian.com/business/2015/jul/25/shareholders-receive-too-much-money-from-business-says-chief-economist
43
44
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
This approach to business affects not only the company in question, but also its
wider value network. Manufacturing unavoidably operates in an interdependent
system of competencies and specialisations, which spreads well beyond a single
entity. This includes suppliers, clients, workers, educational providers and related
service systems.73 The concern must be that the deficit in long-term focus and
investment amongst companies leads to a withering of this inter-reliant ecosystem,
and constrains the ability of other, smaller companies to grow and flourish.
The interaction between a shift toward more sustainable manufacturing and
the typical investment cycle of manufacturers, poses some difficult questions.
Equipment incorporating new technology tends to be more energy efficient than
existing capital. However, the lifetime of existing capital imposes an effective
limit on the rate at which the low-carbon plant and machinery will be purchased.
Carbon-intensive equipment which has a lifetime of 25 years means that emissions
reductions as a result of this investment will amount to 4% maximum, unless
existing capital is to be scrapped ahead of time.74 Investment decisions, however,
are not made through recurring calendar reminders, but in response to perceived
market conditions. Continued ‘sweating’ of assets during economic downturns, or
the substitution of cheaper labour for capital, pushes back the rate at which lowcarbon gains will be made through the investment cycle.
73Chang, H Andreoni, A and Kuan, M; “International Industrial Policy Experiences and the Lessons for the UK”, 2013, 14.
74 Fankhauser, S, “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 4.
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
45
The Question of Finance
Shortages of capital are a commonly cited barrier
to investment in efficiency measures, and is one
of the most frequently-mentioned factors by firms
themselves.75 However, care is warranted in how
we interpret this. UK non-financial corporations
have been net-lenders since 2002, with the sector
as a whole having large cash surpluses. With
regards to many larger corporations at least,
any failure to invest in efficiency measures is
likely to be more a matter of internal decisionmaking processes and short-termism than actual
shortages of finance. In such cases where internal
finance is readily available, policy measures to
increase the external supply of finance are unlikely
to make much difference.
Where shortages of finance are more likely to
be an issue is among SMEs. Through a higher
degree of perceived-risk and lesser access to
collateral, greater risk-aversion in the banking
sector following the global financial crisis is likely
to have a greater effect on SMEs than on larger
firms. However, a deeper factor at play here is
the pattern among liberal market economies of
not relying on bank-financing.76 Reluctance to
take on additional ‘gearing’ – the ratio of equity
to loan finance – for the company as a whole may
result in efficiency measures being foregone, even
when the required capital investment is relatively
low.77 Features of the institutional architecture of
coordinated market economies, such as German
local savings banks (Sparkassen), provide
dedicated long-term finance to SMEs which allow
investment in incremental efficiency gains with
greater certainty.
75Baruah, P et al, ”Firm Level Perspective of Energy Efficiency
Barriers and Drivers in UK Industry – Indications from an Online
Survey”, BEHAVE Energy Conference, 2014.
76Hughes, A, “Short-termism, impatient capital and finance for
manufacturing innovation in the UK”, 2013.
77Sorrell, S et al, “Barriers to industrial energy efficiency: A literature
review”, UNIDO, 2011, 28.
Addressing this challenge should begin with the
public institutions already tasked with providing
financial support. The Green Investment Bank
(GIB), having been criticised from the outset for
its modest scale and lack of borrowing powers,78
was still left with a considerable portion of
its funds which could have been put to use in
manufacturing. This suggests that work with
both SMEs and the GIB on building business
cases for efficiency measures (for internal firm
purposes, as well the GIB’s) could allow firms
that do have capital shortages to make use of the
funds available. The news as of June 2015 that
the GIB is to be partially-privatised79 adds to the
uncertainty around the provision of patient capital
to green infrastructure, efficiency measures and
the diffusion of new technologies. It is unclear
why a GIB backed by private finance would not be
subject to the same shortcomings which made it
necessary in the first place.
78Ekins, P et al, Greening the Recovery: the report of the UCL Green
Economy Policy Commission, UCL, 2014, 128.
79“Green Investment Bank to be part-privatised”, BBC News,
25 June 2015, available at http://www.bbc.co.uk/news/
business-33263710
46
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
A Vision from Government
Policy-makers quickly learn that there are limits on how much they
can influence business decisions with words alone. Nonetheless,
the tone which government sets through its actions and public
pronouncement can send clear signals on policy-makers’
commitment to sustainable manufacturing, and help to shape
business expectations. As companies and their consumers begin to
pay more attention to the overall environmental impact of products
and industrial processes, the collective sense of whether the UK is
looking to be a leader on sustainability is likely to increasingly affect
decisions on inward investment and innovation.
This inquiry heard evidence from AkzoNobel, a chemical
and coatings manufacturer headquartered in the
Netherlands, that slow progress on grid-decarbonisation
was a major barrier to the company meeting its own
sustainability targets, and that it was now making
decisions on suppliers based on their carbon footprint. UK
manufacturers, and the UK as a whole, risk losing valuable
business if other countries are seen as being more proactive
in promoting long-term sustainable thinking.
In September 2015, the Director-General of the Confederation of
British Industry, John Cridland, warned that ‘mixed messages’ in
the form of shifts in climate change policies “send a worrying signal
about the UK as a place for low-carbon investment”.80 In 2012, GE
Energy cancelled over £100m of investment in a UK wind turbine
factory, citing “current uncertainty surrounding the government’s
renewable energy policy”.81 While there are many obstacles
to business sector leadership on sustainable manufacturing,
government cannot afford to be adding further barriers to green
investment by projecting equivocation on its commitment to
sustainability.
80Cridland, J, “What a good climate deal will mean for Britain and the world”, speech to BeyondParis, 22 September 2015, available at http://
news.cbi.org.uk/news/what-a-good-climate-deal-will-mean-for-britain-and-the-world/
81http://www.eaem.co.uk/news/cameron-cancels-pro-renewables-speech-industry-dismay
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
47
Policy Recommendations:
Recommendation 1
Recommendation 2
The government should promote energy efficiency
measures through the provision of low-interest
loans, repaid through subsequent savings from
efficiency gains: this will help reduce uncertainty
around efficiency measures through the public
sector effectively taking on the perceived
investment risk. Qualifying efficiency measures
should be tied to Energy Savings Opportunity
Scheme (ESOS) audits, which should also be
expanded to SMEs (with the cost of the audit able
to be tied and repaid through the loan scheme).
This funding mechanism is similar to the model
of the Green Deal home energy-efficiency scheme.
To avoid the shortcomings of that scheme, finance
should be made available at low-interest or
interest-free levels, rather than having the positive
externalities of greater efficiency be undermined
by providing finance at commercial rates.
usiness expenditure on efficiency measures
B
which build national resilience should be taxdeductible, expanding the R&D tax credit into a
resilience, research and development (RR&D) tax
credit: like R&D, spending on energy efficiency
entails benefits for the rest of society (positive
externalities). R&D tax credits are a form of
reporting that businesses are incentivised to
do, and the benefits of the scheme can result in
firm processes being structured around them.
Expanding this scheme to include energy- and
resource-efficiency will make these measures more
central to management attention. This could be
an alternative scheme to recommendation 1, or
designed to work in conjunction with it.
GOVERMNET LOANS FOR
EFFICIENCY MEASURES
GOVERNMENT
£
LOAN REPAID
£ £
FACTORY
ENERGY EFFICIENCY
MONITORING
Fig. 7 “Recommendation 1: Government loans for Efficiency Measures”
£
COST SAVING
48
Industrial Evolution - Making British Manufacturing Sustainable
1. Leadership
Recommendation 3
Carbon reduction schemes should be redesigned
to force top management attention on to savings
opportunities through revisiting the Carbon
Reduction Commitment (CRC): the Carbon
Reduction Commitment (CRC) scheme82 was
applied to energy-intensive industries not covered
by the emissions trading scheme from 2010.
It initially included provisions for publicallyreported league tables of firm performance,
rebates to the best performers, and requirements
that top management sign off on performance
reports. However, these more innovative measures
were dropped from May 2013 onward, leaving
the scheme as mainly another carbon pricing
mechanism. This approach should be revisited and
combined with the climate change levy, with the
benchmarking and rebate performance incentive
measures expanded across the whole scheme.
Publication of league tables would help narrow the
‘knowledge gap’ around efficiency measures, and
provide consumers with greater information on
the products they purchase.
Recommendation 4
Measures to decrease the knowledge gap on
energy and resource efficiency, such as data
sharing and ‘sustainability champions’ within
the firm hierarchy, should be promoted. drawing
attention to companies’ relative standings in
terms of efficiency will help close the knowledge
gap. Additionally, efforts to encourage Chief
Sustainability Officers or ‘sustainability
champions’ within firms, sitting within topmanagement or reporting directly to the CEO,
would make sustainable measures a management
priority for a greater number of firms. These
measures should be promoted and facilitated
by intermediary institutions such as trade
associations.
82 Later renamed the CRC energy efficiency scheme
Recommendation 5
Greater incentives for capital investment in lowcarbon plant and machinery should be prioritised
over cuts to corporate taxation: this would help
bring forward new investments, and would also
mitigate short-termism in corporate decisionmaking and encourage long-term investment.
The existing Enhanced Capital Allowances (ECA)
scheme, which allows investment is certain energy
efficient machinery to be offset against taxable
income, should be broadened. The Annual
Investment Allowance (AIA), which was pegged
at £200,000 during the 2015 summer budget,
should be tied to the carbon budgets set by the
Committee for Climate Change to discourage
‘lock-in’ of long-life, carbon-intensive investments.
Recommendation 6
Sustainability should be entrenched across the
UK’s education system, particularly in engineering
and management courses, and measures to
improve management skills among UK executives
should be promoted: evidence suggests that
good management skills correspond with better
environmental performance at firm level, and that
the number of degree holders at management
level is a notable weakness of the UK. Measures
to support post-graduate and part-time study83
by executives might therefore result in better
economic and environmental outcomes. This
relationship should be reinforced by ensuring
that sustainability is a key focus of higher
education courses which are of most relevance
to manufacturing – particularly engineering and
business courses.
83For a more comprehensive analysis of existing barriers, see the
Higher Education Commission’s report, Too Good to Fail: The
Financial Sustainability of Higher Education in England, 2014
2
RESILIENCE
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Known ecological limitations require a transition to
a manufacturing sector which places much less of
a burden on the natural environment than the
practices and stock of capital inherited from
previous generations.
Yet future challenges arise not just from the unsustainability of a
business-as-usual approach, but from disruptions of an economic,
political, social or technological nature which are often unpredictable, and beyond our direct control. Future trends around demographic shifts, climate change-related events and material shortages
are likely to have a complex impact on national and global systems.
Even harder to predict is the interrelated impact of these trends;
how they will exacerbate or feedback upon one another.84
There is a tendency among observers of the UK economy to focus on
mistakes and missed opportunities of the past; a pastime which led
renowned US economist Robert Solow to quip: “Every discussion
among economists of the relatively slow growth of the British economy compared with the continental economies ends up in a blaze
of amateur sociology”. There are undoubtedly lessons which can
(and have) been learned from history. However, an excessive focus
on avoiding a repeat of previous mistakes is not enough to secure a
lasting and vibrant manufacturing sector if the challenges of the
future are different from those of the past.
An industrial system which is resilient to future shocks is a
prerequisite of a sustainable economy. An adaptive and flexible
manufacturing sector can not only insulate itself from disruptions
in the availability of key resources and inputs, but can also provide
a ballast for the general economy in terms of economic activity
and innovative ways of meeting society’s needs. There is a pressing
need for policy-makers and industry to work together to improve
the resilience of the economy, in areas such as material and energy
security, critical resources, and decarbonisation.
84 Tennant, M, “Sustainability and Manufacturing”, 2013, 6.
51
GLOBAL MATERIAL EXTRACTION IN BILLION TONS 1900-2005
GDP
TRILLION (1012)
INTERNATIONAL DOLLARS
MATERIAL EXTRACTION
BILLION TONS
10
0
0
FOSSIL ENERGY CARRIERS
CONSTRUCTION MINERALS
00
20
19
9
19
8
0
19
7
19
6
19
5
19
4
19
3
19
2
ORES AND INDUSTRIAL MINERALS
0
20
0
20
0
40
0
30
0
60
0
40
0
80
19
10
50
0
100
19
0
52
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
BIOMASS
Fig. 8 “Global Material Extraction in Billion tons 1900-2005”
Source: UNEP, Decoupling Natural Resource Use and Environmental Impacts from Economic Growth, 2011
Material Security and Volatility
The fact that the UK is an island nation has meant that it has relied on external
sources of raw material inputs since world trade was in its infancy. Today, the EU
remains the region of the world most reliant on the rest of the world for its raw
materials.85 The continued economic emergence of the developing world promises
increases in material living standards for some of the world’s poorest citizens, but
also poses major challenges for the supply of raw materials for countries such as
the UK.
Advanced countries use much more material per capita than the world average –
approximately 60% more. The UK’s material use per capita is among the lowest in
the OECD, but that is true of other resource-poor and densely-populated nations.
This is in part a consequence of off-shoring, which results in the UK importing
finished goods which weigh much less than the raw materials used to make
them.86A similar pattern of ‘exporting’ our overall environmental impact is evident
in carbon emissions: while the UK’s emissions from production have fallen since
1990, consumption emissions have seen no improvement over the same period –
and were in fact increasing until the contraction of economic activity following the
global financial crisis.87
85 Parker, D; The Future Impact of Materials Security on the UK Manufacturing Industry, 2013, 5.
86 OECD, The Material Basis of the Global Economy, 2015, 80.
87 Martin, R et al, Energy and the Environment: a cold climate for climate change policies?, CEP, 2015.
GDP
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
53
Industrialisation – the shift of a country’s workforce from agriculture to industry
– results in countries using much more non-renewable resources than renewable.
Non-renewable resources such as construction materials, fossil fuels and metals
now represent over two-thirds of total material extraction across the world, having
accounted for around a quarter 100 years ago.88 Population growth inevitably slows
with continued economic development (and has been happening in both China
and India), but the global population is still projected to reach over 9.5 billion by
2050, which could result in a tripling of global resource use.89 Similarly troubling
projections have been made for the increased global demand of water (an increase
of 55% between 2000 and 2050) and for increased competition for land.90 Given
these trends, the continued ability of UK manufacturers to access materials and
other inputs as readily as they have done cannot be taken for granted.
There are relatively few resources for which absolute depletion is an issue. The true
risk for most materials is increased competition for resources and price volatility
(through both demand growth and the exhaustion of more easily accessible
supplies) and disruption to supply chains arising from extreme weather events or
geopolitical unrest. These concerns are mirrored in the views of UK businesses.
A 2012 survey by EEF the manufacturers’ organisation found that access to
raw materials was considered a business risk by 80% of senior manufacturing
executives, while one in three considered it their top risk.91
DIVERSIFICATION OF SUPPLY LINES
NON-DIVERSIFIED SUPPLY CHANNELS
MORE DIVERSIFIED SUPPLY CHANNELS
AND REUSE OF MATERIALS
VULNERABLE TO
SUPPLY DISRUPTIONS
INDEX OF GLOBAL
COMMODITY PRICES
Fig. 9 “Diversification of Supply Lines”
Source: Commodity price trend line from McKinsey Global Institute Commodity Price Index, 1980-2014
88OECD, The Material Basis of the Global Economy, 2015, 64.
89UNEP, Decoupling Natural Resource Use and Environmental Impacts from Economic Growth, 2011.
90 Government Office for Science; The Future of Manufacturing, 2013, 155.
91EEF Survey – Available at http://www.eef.org.uk/about-eef/media-news-and-insights/media-releases/2012/aug/government-must-take-strongeraction-over-looming-raw-material-shortage
54
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
As globalisation has deepened the interconnectedness of economic relations across
national boundaries, it has also amplified the degree to which shocks in other
parts of the world reverberate within the UK. The potential impact of supply chain
volatility was seen during the 2011 Fukushima disaster in Japan. The disruption
in the supply of key automobile components resulted in a halving of production in
some UK automobile factories during mid-2011, and the loss of some 22,000 cars
during the year.92 Trends in organisational practices toward lean or ‘just in time’
production have resulted in lower inventories, and greater vulnerability to shocks
within global production networks.93 The increased risk of extreme weather events,
which can damage infrastructure, and disrupt the supply of materials, raises the
importance of measures which allow manufacturers to mitigate and adapt to
unpredictable future challenges.94 This might include much greater collaboration
in the face of severe supply disruptions, as occurred in Japan following the
Fukushima disaster – for instance, plans to stagger production shifts and working
days to relieve pressure on the energy system.
Fundamental approaches to building resilience in the use and sourcing of
vulnerable inputs include:
•G
reater efficiency: the barriers to greater efficiency have been discussed in
Section 1 of this report. However, greater understanding of the risks associated
with material security can help to shift efficiency measures from being an
environmental or purely economic matter, to being a strategic consideration for
an increasing number of firms.
•B
etter management and diversification of supply chains: this includes better
inventory management, collaboration across supply chains, and localising/
diversifying supply sources.95
• Light-weight or longer-life materials: estimates suggest that designing for lighterweight products, prioritising minimal use rather than cost reduction, might save
one third of material use.96 Product redesign can contribute to slowing down
material consumption through greater durability or easier replacement of critical
components.97 However, whatever benefits light-weight materials bring, must
also be balanced against the difficulty they can cause for re-use, where they have
trouble retaining their value.
•M
aterial substitution: this includes replacing non-renewable with renewable
materials in order to reduce pressure on finite resources, or generating innovative
new materials.98
• I ncreased recycling and waste-minimisation: despite the established status of
lean manufacturing and other waste-minimising approaches, analysis shows that
yield losses across supply chains are still considerable in areas such as blanking
and trimming of sheet metal.99
92 Pike, A et al, How does Manufacturing contribute to UK Resilience? 2013, 30.
93Ibid
94 Tennant, M, “Sustainability and Manufacturing”, 2013, 13.
95EEF, Be Prepared: Monitoring Supply Chains; Maximising Resilience; 2012, 11.
96 Allwood, J et al; “Material Efficiency: Providing Material Services with less Material Production”, Phil Trans R Soc A, 2013, 5.
97Ibid
98 Tennant, M, Sustainability and Manufacturing, 2013, 23.
99Allwood, J et al; “Material Efficiency: Providing Material Services with less Material Production”, Phil Trans R Soc A, 2013, 5.
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Improving material efficiency also has flow on effects toward reducing global
energy use and carbon emissions upstream, as well as local benefits through less
waste-processing and associated energy use.
Critical Raw Materials
Particular concern for resource security focuses around critical raw materials
(CRMs), which are important to high-tech and strategic manufacturing activities.
In 2014 the European Commission published an updated list of 20 CRMs from
a European perspective, which are selected not just on the basis of economic
importance and scarcity, but also on the risks associated with their supply.100
China’s decision in 2010 to restrict the export of rare earth elements101 – of which
it produces 97% of global supply – brought the issue of critical materials to the
forefront of many countries’ minds in terms of strategic economic interest and
national security. These export quotas were lifted in January 2015 following
a challenge at the World Trade Organisation. However, the prospect that
access to other materials will be determined by national preference rather than
market forces represents an area of significant uncertainty for UK industry and
policy-makers.
Criticality of particular resources depends on a number of factors, including the
potential for geopolitical unrest, diversity of suppliers and the ease of recovery of
post-consumer material. For instance, the Democratic Republic of Congo produces
40% of the global supply of cobalt, which is used in batteries, alloys and catalysts.102
End-of-life cobalt is recycled at a rate of 68%. Conversely, tantalum (which is an
important input for the aerospace industry) has a more diverse range of supply
sources, but is much more difficult to recycle from post-consumer engines and
electronic scrap.103
CRMs are often used in low-carbon technology, meaning that supply shortages
and disruptions may affect the UK’s efforts at decarbonisation. Wind turbines
rely on neodymium iron boron magnets, which contain the rare earth element
neodymium. The pressing need to continue to cut carbon emissions could also put
low-carbon industries in competition with other key manufacturing industries for
the UK. For example, hydrogen fuel cells use platinum group metals (PGMs) as
a catalyst. Increased demand for PGMs, however, could disrupt the automobile
industry, which makes use of them in catalytic converters.104 Like rare earth
elements, the supply of PGMs is heavily concentrated. South Africa is the world’s
biggest producer, followed by Russia. Hence they are regarded as having a high
supply risk.
Assessing the impact which CRMs might have on UK manufacturing is far from
straight-forward, as it relies not only on a constant evaluation of material usage
and geopolitical risks, but on an understanding of potential growth industries
within the UK. Additionally, future demand for CRMs is dependent on the
path of emergent technology, such as new innovations in transportation or the
development of different polymers and alloys within the electronics industry. As
the examples of Concorde, Betamax and the Sinclair C5 demonstrate, the market
for different technologies can be difficult to predict in advance.
100http://ec.europa.eu/growth/sectors/raw-materials/specific-interest/critical/index_en.htm
101 REEs are often used in electronics and advanced technology.
102 Parker, D The Future Impact of Materials Security on the UK Manufacturing Industry, 2013, 16.
103Ibid
104Ibid
55
56
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Recent OECD work attempts to project the landscape for CRMs in 2030 for
the OECD as a whole, based on anticipated supply risks and shifts in economic
importance of particular materials. In doing so, the work recognises that some
aspects of what makes a material ‘critical’, such as low-substitutability and lowrecycling rates, are not inevitable features of the future, but are the result of policy
choices. R&D around material substitutes, investment in recycling capabilities and
improving data collection on material use are all measures which will determine
the ‘criticality’ of materials such as fluorspar, manganese, bauxite, copper and
potash for future generations.105
Manufacturers can often be unaware of their reliance on CRMs elsewhere in
the value chain, meaning identification of any supply risks is crucial to building
resilience.106 Other key measures include improving efficiency and wasteminimisation in the use of CRMs; identifying and developing potential substitute
materials, products or processes; or (more radically) taking a strategic approach
to the allocation of CRMs within the UK based on the importance or availability
of substitute materials between sectors.107 The circular economy and new business
models (which will be discussed in section 5 of this report) will be of particular
relevance to the retention and recirculation of CRMs. Estimates suggest that
recycling rates for many rare metals are less than 1%, particularly owing to their
use in small quantities in widely dispersed products, or in alloying, which makes
them difficult to separate.108 Furthermore, developing coordinated strategies for
diversifying supply channels can contribute to resilience against supply volatility
for materials generally, and CRMs in particular.
In countries such as the United States, Germany and Japan, governments have set
out a coherent policy strategy on resource security, with coordinating institutions
across relevant government bodies. In the UK, responsibility for material security
is spread across at least seven government departments with no overarching
responsibility. It was these concerns which led EEF, along with others, to propose
an Office for Resource Management to be located within the Department for
Business, Innovation and Skills (BIS).109
105 Coulomb, R. et al, “Critical Minerals Today and in 2030: An Analysis for OECD Countries”, OECD Environment Working Paper No. 91, 2015.
106 Gardner, L, “Critical Materials and Resilience”, presentation to Conference of the Centre for Industrial Sustainability , July 2015.
107 Parker, D, The Future Impact of Materials Security on the UK Manufacturing Industry, 2013, 32.
108 Graedel, T et al, “What Do We Know About Material Recycling Rates?”, 2011.
109EEF, Materials for Manufacturing: Safeguarding Supply, 2014, 7.
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
57
CRITICAL RAW MATERIALS MAP
NEODYMIUM
USED IN:
WIND TURBINES
PLATINUM GROUP
METALS
CHINA
USED IN:
AUTOMOBILES
DEMOCRATIC REPUBLIC
OF CONGO
SOUTH AFRICA
Platinum group metals include: PLATINUM, RHODIUM, OSMIUM, RUTHENIUM, IRIDIUM, PALADIUM
Fig. 10 “Critical Raw Materials Map”
COBALT
USED IN:
BATTERIES
ALLOYS
CATALYSTS
58
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Tracking Material Flows
As discussed earlier in this report, the fact that government often has worse
information than the private sector does not mean that it should not have a role
in correcting market or system failures. It does, however, mean that the flow of
information between the public and private sector is paramount for the creation of
effective policy.
The flow of materials throughout the system is determined by a complex array of
social, economic and technical factors. Greater information on how these flows
operate would allow for better policy-making from the public sector, and more
opportunities for the private sector to identify unrealised gains and spaces for new
enterprises.
Manufacturers, of course, collect and aggregate huge amounts of information as
a matter of economic necessity and existing regulatory requirements; however
the way in which they do so could be much better calibrated to helping develop
resilience in our use of materials. As the UCL Green Economy Policy Commission
noted, material flows are “still to a large extent unmonitored compared to the
financial flows that they accompany, which are tracked through the accounts in
great detail, resulting in sub-optimal decisions about materials management at
every stage of their journey through the economy, but especially when they have
become ‘wastes’”.110 The Commission recommends that ONS be given responsibility
for evaluating existing stocks of natural capital, and for creating more comprehensive accounts to track material flows throughout the economy. The development
of effective policy to promote national resilience against future resource insecurity
simply cannot occur when policy-makers are blind to the ways in which we use
materials currently.
110Ekins, P et al, Greening the Recovery: the report of the UCL Green Economy Policy Commission, UCL, 2014, 38.
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Decarbonisation
Manufacturing accounts for approximately 30% of the UK’s
total greenhouse gas emissions (inclusive of indirect electricity
consumption),111 with the remainder largely split between transport
and buildings. The UK Climate Change Act requires cuts of 80%
to the UK’s greenhouse gas emissions relative to 1990s levels.
The decarbonisation roadmap set out by the CCC envisions an
accelerating rate of decarbonisation from 3.2% per annum for the
period 2008-2030, to 4.7% for 2030-2050 based on the assumption
of falling costs of low-carbon technologies. This assumption
itself assumes that such advances in low-carbon technology
will be brought about by public and private investment in the
decarbonisation of all sectors of the economy.112
111CCC, Fact Sheet: Industry, available at https://www.theccc.org.uk/wp-content/uploads/2014/08/Industry-fact-sheet-2015-v1.1.pdf
112Fankhauser, S, “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012.
59
60
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
GHG EMMISIONS FROM INDUSTRY IN THE CONTEXT
OF TOTAL UK EMMISIONS (2014)
TOTAL EMISSIONS
521 MtCO2e
OTHER SECTORS
70%
MANUFACTURING COMBUSTION
11%
MANUFACTURING PROCESS CO2
2%
MANUFACTURING NON-CO2
4%
REFINES CO2
3%
OTHER ENERGY SUPPLY C02
4%
INDUSTRY SHARE OR POWER SECTOR CO2
7%
MANUFACTURING AND REFINING C02 BY SECTOR (2012)
WOOD
2%
TEXTILES
2%
RUBBER & PLASTICS
2%
OTHER MANUFACTURING
1%
VEHICLES
2%
GLASS & CERAMICS
3%
NON-FEROUS METALS
3%
ELECTRICAL ENGINEERING
1%
REFINERIES
14%
CHEMICALS
14%
WATER & WASTE MANAGEMENT
3%
MECHANICAL ENGINEERING
4%
PAPER, PULP & PRINTING
4%
FOOD, DRINK & TOBACCO
8%
Fig. 11 “UK Manufacturing’s share of GHG Emissions, and breakdown by sector”.
Source: Committee on Climate Change, Fact Sheet: Industry
IRON & STEEL
14%
CONSTRUCTION
10%
CEMENT & LIME ETC
9%
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
UK manufacturing’s emissions fell by 20% during the first five-year
carbon budget set by the CCC (2008-2012), and have continued
to fall throughout the second, based on provisional estimates.
Progress in industrial decarbonisation is occurring ahead of the
CCC’s trajectory indicators for both non-electrical energy intensity
and the uptake of low-carbon heat.113 However, this news should be
tempered by the fact that this period coincided with a steep decline
in economic output during the global financial crisis. A sustained
economic downturn might have its advantages from a purely
environmental point of view, but it could not be considered socially
sustainable.
The collective need to transition away from one source of energy
may generate significant scarcity issues in the alternatives. The BIS/
DECC decarbonisation roadmaps produced in 2015 for energyintensive industries identified the replacement of fossil fuels with
biomass as a key decarbonisation strategy for six out of the eight
sectors examined: cement, ceramics, chemicals, food and drink,
glass, and (most especially) paper and pulp.114 The continued supply
of agricultural biomass requires large quantities of land and fresh
water, which puts the supply of biomass in potential competition
with other demands associated with a growing global population,
such as high-protein food and living space.
Current renewable energy obligations for the energy sector also
mean that electricity suppliers are in competition for biomass,
which raises the cost for manufacturers seeking to decarbonise
their fuel sources. The cement industry has decreased its carbon
intensity per tonne of cement by 22% since 1998, and now derives
44% of its fuel from waste and biomass. The need for consistent
heat patterns limits the share of the sector’s fuel that could be
switched to alternative sources to around 80% (which means that
new technology, particularly carbon capture and storage, becomes
crucial).115 The paper and pulp industry could potentially achieve
reductions of two-thirds of its carbon emissions through replacing
the fuel used in mills to generate steam with biomass.116 However,
increased competition for biomass makes it hard to see how such
levels might be attained without a more strategic approach to the
allocation of material to where its decarbonisation potential is the
greatest – the so called ‘cascade principle’.
113 CCC, Progress in Reducing the UK’s Emissions: 2015 Report to Parliament, 2015.
114BIS/DECC Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050: Cross Sector Summary, 2015, 16.
115BIS/DECC Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050: Cement, 2015, 30.
116BIS/DECC Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050: Paper and Pulp, 2015, 44.
61
62
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Carbon Capture and Storage
Carbon Capture and Storage (CCS) is considered a key potential decarbonisation
strategy for industries such as cement, chemicals, glass, steel and refining. It is also
an important component of reducing the carbon-intensity of electricity production.
It involves the capture and transferal of CO2 from industrial processes through
compression, liquefaction or pipelines. The resulting carbon stocks can be stored in
onshore or offshore geological formations or used as a feedstock in other chemical
processes.117
The lack of progress on CCS presents a stark contrast to the importance which is
placed on the technology in both the BIS/DECC roadmaps for UK energy intensive
industries, and the European Commission’s 2050 decarbonisation roadmap.
Within the UK, the technology has reached demonstration stage within the energy
sector, but remains uneconomical for commercial use within the manufacturing
sector.118 Hence, projections by the Committee on Climate Change suggest that
CCS would at best be a medium-long term solution to decarbonisation (from 2030
onwards).119
CCS requires significant capital investment, and the price on carbon which would
make it competitive with alternatives that emit carbon as usual is relatively high
– though actual likely costs depend heavily on the purity and concentration of the
CO2 which is produced, and vary considerably between industries.120 CCS is a highrisk, high capital expenditure technology, the policy implications of which will be
dealt with in section 3 of this report. It also requires significant investment in both
transport and storage infrastructure, the latter of which is subject to a great deal of
uncertainty as to the costs.121 Interestingly, exhausted North Sea oil and gas fields
and their remaining infrastructure might prove to be suitable for carbon storage.122
117BIS/DECC Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050: Cross Sector Summary, 2015.
118CCC, Progress in Reducing the UK’s Emissions: 2015 Report to Parliament, 2015.
119CCC, Fact Sheet: Industry, available at https://www.theccc.org.uk/wp-content/uploads/2014/08/Industry-fact-sheet-2015-v1.1.pdf
120Green, R and Zhang, X, “The Future Role of Energy in Manufacturing”, 2013, 15.
121Bassi et al, ”Bridging the gap: improving the economic and policy framework for carbon capture and storage in the European Union”, 2015, 33.
122Green, R and Zhang, X, “The Future Role of Energy in Manufacturing”, 2013, 15.
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Energy
Challenges to the resilience of manufacturing with regards to energy stem from
price volatility and the reliability of supply. The industrial sector’s share of total
UK energy use has fallen from 43% in 1970 to around 20% in 2011 as the share of
manufacturing in GDP has fallen. However, the energy mix within the sector’s total
consumption has also shifted, with gas and electricity use increasing at the expense
of coal, coke and petroleum. Shifts in the make-up of the sector, as well as progress
on energy efficiency, have also influenced the weight of manufacturing within the
UK’s total energy consumption.123 Continued shifts in the mix of energy sources
can be expected, as many industrial processes are electrified, and consumption
switches away from gas - which is best considered an intermediate technology, as it
is an improvement on other existing options but not sufficiently so to meet longterm carbon limitations without CCS.124
Accurate projections of energy prices are not necessarily straightforward, as
they depend on the progress of new technology for decarbonisation, and on the
efficiency efforts of other sectors of the economy. The most effective way that
manufacturing can be resilient to price volatility is to increase the efficiency of their
energy use at every stage, though firms’ abilities to do so will vary depending on
the measures available to them and progress which has been made to date. Over
the short- to medium-term there is likely to be upwards pressure on energy prices
due to increased reliance on early-stage renewable technologies and additional
costs associated with CCS, though in recent times the falling price of fossil fuels
have kept energy prices lower than they would otherwise have been. By 2020,
such increases might amount to as much as 49% for a medium size manufacturing
firm, which comes on the back of a 94% increase since 2002.125 This naturally
raises concerns around national competitiveness, job losses and ‘carbon leakage’
overseas.
It is important to distinguish shifts in cost competitiveness that arise from the
internalisation of externalities from those that result from the uneven imposition
of carbon prices. So-called Pigouvian taxes are intended to change the demand for
some products in favour of others, as a reflection of the social cost associated with
the more carbon-intensive option. However, policy measures which simply result
in consumers switching to imported products that do not face equivalent carbon
prices are counterproductive to environmental objectives, as well as social and
economic one. Uneven carbon-price support between EU members in industries
such as cement, lime, glass and ceramics is not desirable if it results not in
innovation, but in the loss of jobs and the import of heavy products from elsewhere
in the EU.
This asymmetry between national approaches to carbon prices and markets which
are global in scale raises the possibility of evening out this tax treatment at the
border. Though the common refrain is that this would be difficult under the World
Trade Organisation (WTO), the issues here are more likely ones of politics and
concerns around retaliation, rather than specific trade rules. In any case, it is not
123 Green and Zhang, “The Future Role of Energy in Manufacturing”, 2013, 10.
124Fankhauser, S, “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 5.
125 Increase is for 2002-2012 period. EEF, Business Productivity and Energy Efficiency, 2014.
63
64
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
clear why the existing rules of one global institution on trade should be considered
sacrosanct at the expense of global efforts toward combating climate change.
Border levelling of effective carbon prices is likely to be a complex undertaking
for some products with more diverse processes, but could be suitable for some
products. In such cases it would be a preferable approach to free allocation of
carbon allowances, which shift the burden of decarbonisation targets to the rest of
the economy.126
Another potential risk to the resilience of UK manufacturing stems from the
reliability of the supply of energy. Currently, the average UK consumer loses
electricity supply for around 80 minutes per year through distribution problems
or outages due to a shortfall in electricity generation, though industrial consumers
are more vulnerable than the average UK consumer due to their higher energy
requirements. The costs of these shortages can be substantial, with estimates
suggesting that a four hour blackout in the West Midlands region on a normal
working day would result in a loss of approximately £25 million pounds.127
The Office of Gas and Electricity Markets (Ofgem) suggests that uncertainty around
electricity shortfall remains high from 2016-2017 onward as the retirement of older
plants cuts into spare capacity.128 The intended growth in the share of renewables
within the energy system also raises the potential for greater unreliability,
particularly from wind and solar which have only intermittent supply. This raises
the importance of ‘balancing’ capacity of energy generation which can respond
to short-term fluctuations in demand or supply, and in particular, the carbonintensity of this back-up generation. The unreliability of some renewables also
means that policy must be designed in a way which incentivises investment in
capacity which will be idle more often than not.129 The Electricity Market Reforms
implemented from 2013 onward include a capacity market to address this issue,
which has been criticised by the Energy and Climate Change Select Committee
for keeping more carbon-intensive power stations online.130 In light of this, other
measures that can help the issue of renewables’ intermittency, such as better
energy storage technology and developing transmission links across the EU, should
be prioritised.
Greater use of demand-side measures is one way in which manufacturing
can contribute to a more resilient and reliable energy system. Many larger
manufacturers already provide demand-response services to the National Grid,
which involves the exchange of information between production systems and
the electricity grid. This enables the intermittent switching-off of the electricity
supply in a way that evens out short-term grid fluctuations without disrupting
manufacturing processes. This presents an opportunity for manufacturers in the
form of an alternative revenue stream, but requires a willingness to look outside
of their core business model and collaborate with others in an unfamiliar area.
Greater utilisation of this, and other measures such as capturing residual heat
from industrial processes, can help square the circle of balancing spare capacity
and decarbonisation. A more flexible approach from the National Grid in engaging
with manufacturers on energy demand, rather than the current blunt approach to
pricing, could help improve the stability of the energy system overall.
126 Carbon Trust, Tackling carbon leakage: Sector-specific solutions for a world of unequal carbon prices, 2010.
127 Green, R and Zhang, X, “The Future Role of Energy in Manufacturing”, 2013, 24-29.
128Ibid, 24
129 Fankhauser, S, “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 5.
130http://www.parliament.uk/business/committees/committees-a-z/commons-select/energy-and-climate-change-committee/news/emrpublication1/
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
65
Manufacturers are also building resilience to grid fluctuations and carbon pricing
by developing onsite renewable capacity. A good example of this is the Hanson
cement plant at Ketton, which has reduced its reliance on fossil fuels and electricity
through a combination of on-site waste incineration and a nine megawatt solar
energy farm.131 Although a more sustainable industrial economy would be the
end result of these measures, a more effective approach for government might be
to encourage more companies to treat this as a strategic approach to mitigating
future risks to production, rather than a matter of sustainability per se. As
businesses are much more accustomed to anticipating and preparing for future
market developments than they are the long-term challenges of environmental
sustainability, the goal for policy-makers and business leaders is to ensure that
these issues increasingly become one and the same conversation.
THE PROJECTED INCREASE IN RENEWABLE ENERGY GENERATION RAISES
THE IMPORATANCE OF MEASURES TO BALANCE INTERMITTENCY
1200
NON-THERMAL RENEWABLE GENERATION
NUCLEAR POWER
1000
GRID STORAGE
COMBUSTION + CCS
UNABLE THERMAL GENERATION
TWh/year
800
TRANSMISSION CONNECTIONS
TO THE CONTINENT
600
400
DEMAND MANAGEMENT
SCHEMES
200
45
50
20
20
35
40
20
20
25
30
20
20
15
20
20
20
10
20
20
05
0
Fig. 12 “The Projected Increase in Renewable Energy Generation raises the Importance of Measures to Balance Intermittency”.
Source: Adapted from Pathway Alpha, “2050 Pathways Analysis”, DECC, 2010.
131http://www.hanson.co.uk/en/sustainability/carbon-climate-change-and-energy
66
Industrial Evolution - Making British Manufacturing Sustainable
2. Resilience
Policy Recommendations:
Recommendation 7
A new ‘challenge-focused’ Catapult should
be established to examine and build our
understanding around cross-sectoral areas of
concern relating to resilience, and to convene
relevant actors around addressing these issues.
Although the existing Catapult centres are focused
on coordinating businesses and universities
around commercial opportunities, a similar model
ought to be applied to convene key actors, such
as professional bodies, academic institutes, skills
providers and trade associations, around crosssectoral areas in which could contribute to the
UK’s economic resilience, such as;
i. the strategic use of biomass for
decarbonisation;
ii. t he diversification of supply channels for key
industries in order to reduce vulnerability to
regional supply disruptions;
iii. the use of energy demand-management
measures to contribute to national resilience
within the energy system, and to develop
contingency plans for dealing with future
systemic shocks
Recommendation 8
Government should prioritise measures to
increase the reliability of renewables and to
mitigate their intermittency: this includes R&D
efforts toward energy storage technologies,
investment in longer scale transmission across
the EU, and examining incentives for greener
balancing capacity.
Recommendation 9
The Office of National Statistics should develop an
enhanced data infrastructure for tracking material
flows: as proposed by the UCL Green Economy
Policy Commission, this would provide policymakers with a much better basis on which to
assess system-level issues in our use of materials,
and open up new business opportunities to make
better use of materials.
Recommendation 10
The Energy Intensive Industries 2050
decarbonisation roadmaps should be expanded
into action plans: this is an area in which
significant government support will be necessary,
particularly in Carbon Capture and Storage
(CCS) R&D and infrastructure. However, this
support should be matched by corresponding
commitments from industry.
Recommendation 11
An Office for Resource Management should be
established within BIS to advise and coordinate
policy-makers on the challenges and opportunities
around resource security; in line with the proposal
made by EEF and others. This should be matched
by corresponding support elsewhere for issues
around Critical Raw Materials (CRM), such as
public R&D support for CRM substitutes and
efforts to promote better recycling of products that
use these materials.
3
INNOVATION
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
The industrial economy must be both a provider
and a beneficiary of new green technology. The
development of new industrial processes and
business models, new low-carbon and energyefficient products, and new materials designed for
longer-life and circularity, is crucial to the challenge
of continuing to meet the needs of society both
today and in the future.
Additionally, manufacturing is but one part of a system which must
collectively work towards a sustainable way of living, through a
greener energy grid and infrastructure, a workforce attuned to new
possibilities, and an innovation ecosystem which generates new
technologies in a concerted and collaborative fashion.
The focus thus far has been on business leadership in sustainability
with regards to known technology, and the building of a national
manufacturing sector which is resilient to disruptions and shocks
beyond our immediate control. Looking beyond these areas
of opportunity, it is clear that new innovations are a pre-condition
for the transition to a sustainable manufacturing sector.
The role of policy is to seek to shape this system in a way which
maximises the possibilities of technological innovation, while
providing a clear direction – a social purpose – to its utilisation
and the development of wider economic structures. The state
must be an active player in the innovation process, not merely
a passive corrector of market failures, topping-up the supply of
basic research or nudging business incentives toward more R&D.
Radical innovations can have a transformative economic and
social impact, but no crystal ball exists to guide investment in this
direction, nor to anticipate whether new technology will serve wider
societal objectives. A ‘mission-oriented’ approach to addressing
society’s most pressing technological challenges, such as griddecarbonisation, carbon capture and storage, and material recovery
technology, can serve to align public and private sector capabilities
toward a more sustainable manufacturing sector.132
132Mazzucato, M and Penna, C (eds),, Mission-Oriented Finance for Innovation, Policy Network, 2015; King, D et al, A Global Apollo Programme
To Combat Climate Change, available at http://cep.lse.ac.uk/pubs/download/special/Global_Apollo_Programme_Report.pdf
69
70
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
Such an approach does entail greater government spending on
innovation, but does not need to be excessively expensive for the
public accounts. As discussed below, UK public spending on energy
innovation is now a fraction of what it was during the cold war,
and even a modest increase in spending in this area could generate
significant advances while still constituting a small share of GDP.
Nations which have fostered effective public innovation systems
range from relatively high-spending Finland to the relatively lowspending United States. More importantly, effective innovation
spending is an investment which generates high returns to the
wider economy in terms of revenue, high-paying jobs and greater
resilience to future shocks.
Arguments for Green Innovation Policy
As discussed previously in the economic theory section, traditional
market failure and public good theories provide the basic, though
incomplete, rationale for industrial policy directed toward green
technology. R&D is a classic case of an investment resulting in
externalities, as the benefit to society as a whole is significantly
greater than that which accrues to the party responsible for the
investment, mainly due to the spread of knowledge beyond that
firm. Recent estimates suggest that the social returns for investment
in science and innovation might be as much as two to three times
higher than the private return.133 This is the underpinning logic
of public R&D spending, particularly in basic research which is
conducted without a particular commercial end in mind. The impact
on the atmosphere resulting from the mitigation of climate change
is also a public good, which means that individual incentives are to
free-ride on others’ efforts to develop green technologies.134
An additional reason for government to promote green innovation
is that current systems of pricing carbon are inadequate. The
International Energy Agency estimates annual fossil fuel subsidies
at $548 billion USD (£361 billion),135 while the International
Monetary Fund calculates that including what would be appropriate
taxes to account for environmental impacts, implicit subsidies
amount to $5.3 trillion USD (£3.5 trillion).136
The UK Climate Change Act 2008 has provided a clearly legislated
target for cuts to UK greenhouse gas emissions (of 80% by 2050,
relative to 1990) and an independent body (the Committee on
Climate Change) to set binding 5-year carbon budgets. However,
one of the key market-based mechanisms by which that goal is to
be achieved, the EU Emissions Trading System, has been relatively
weak, and has been supplemented and mitigated by a series of
unilateral measures. These include the Climate Change Levy and
exemptions from it through Climate Change Agreements; the CRC
133 Frontier Economics, Rates of return to investment in science and innovation, report prepared for BIS, 2014
134 Rodrik, D, “Green Industrial Policy”, 2013.
135Estimate is for 2013, and exchange rate is based on US$1 = £0.66; IEA World Energy Outlook, http://www.worldenergyoutlook.org/
resources/energysubsidies/
136Exchange rate is based on US$1 = £0.66; Coady, D et al, “How Large are Global Energy Subsidies?”, IMF working paper, 2015.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
energy efficiency scheme;137 the fossil fuel energy carbon price floor,
and various disjointed support packages to affected industries. As
researchers from the LSE Centre for Economic Performance put it,
“the complex interactions between different climate policies
has resulted in considerable variability in the effective carbon
price, and consequently in the incentives that different types
of emitters face”.138
Furthermore, there is evidence that the impact of price-based
mechanisms is blunted by the direction of previous innovation.
Although measures such as fuel duties can spur innovation
in cleaner technologies, its direction is influenced by ‘path
dependency’. Firms which are used to innovating in a ‘dirty’
direction continue to build on past improvements, and the same is
true for those exposed to past ‘clean’ innovations. As the current
stock of industrial knowledge has developed down a resource- and
energy-intensive path, there is a good argument for government to
take a greater role in setting the direction of technological change
and avoid the continued ‘lock-in’ of environmentally-damaging
activity.139 Importantly, earlier intervention can lessen the role that
policy needs to play, as private sector research will continue to build
on cleaner technology once it is sufficiently advanced.140
Public commitment to internalising the price of carbon must remain
a priority for the UK at a national, regional and international
level. Although there is growing optimism that the global climate
negotiations scheduled to take place in Paris in late-2015 will result
in an agreement, the likelihood is that a global carbon price is some
way off. This will make it more difficult to strengthen the pricing
of carbon to an effective level, and the failure to price carbon and
other harmful activities adequately increases the importance of
public support for competing low-carbon technologies.141 This is
particularly true for industries facing global competition, and which
have already made significant advances in energy and material
efficiency.
However, broad policy support for green innovation is equally
important as an effective price on carbon and becomes even more
important in its absence. A policy approach focused on incentivising
the private sector through the pricing of externalities, feed-in
tariffs and other such measures is unlikely to be sufficient without
a coordinated and collaborative network of public and private
institutions promoting investment in new sustainable technologies.
An innovation policy which is adequate to the task of making UK
manufacturing sustainable must take on a critical role as a partner
to the private sector in the development of green technologies.
137 Initially the Carbon Reduction Commitment (CRC).
138Martin, R et al; “Energy and the Environment: a cold climate for climate change policies?”, Centre for Economic Performance, 2015.
139Dechezlepretze, A et al, “Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry”, Centre for
Economic Performance, Discussion Paper 1178, 2012.
140 Acemoglu, D et al, “The Environment and Directed Technical Change”. American Economic Review, 102:1, 2012.
141 Rodrik, D; “Green Industrial Policy”, 2013.
71
How does the UK perform on Green Innovation?
The UK has well recognised strengths in its world class research base and ability
to attract top research talent - as judged by its output and number of citations of
academic papers.142 However, its inability to translate this into commercialised
products and national industries has been identified as an integral factor in the
country’s long-running productivity lag.143 The UK has consistently underspent
on R&D, which has accounted for approximately 1.8% of GDP for the past few
decades. This compares poorly to the US (2.7%), Germany (2.8%), Japan (3.4%)
and South Korea (4%).144 With regards to business expenditure on R&D (BERD),
industrial structure explains some of this gap –specifically the UK’s specialisation
in service sector industries. The long-term shift away from manufacturing
as a proportion of the economy has resulted in fewer firms in R&D-intensive
industries.145 However, this long-term underinvestment is evident in public
spending as well as private.
TOTAL GROSS EXPENDITURE ON RESEARCH AND
DEVELOPMENT (GERD) AS % OF GDP IN 2011
5
4
PERCENTAGE %
72
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
3
3.0
2.8
2
2.8
2.0
1.8
1.4
1.4
1
1.0
0.9
0.6
0.8
0.9
0.8
0.8
GERMANY
UNITED
STATES
FRANCE
AUSTRALIA
0
SOUTH
KOREA
FINLAND
JAPAN
1.2
1.1
0.6
0.7
UNITED
KINGDOM
CANANDA
Fig. 13 “Total Gross Expenditure on Research and Development (GERD) as % of GDP in 2011”
Source: Allas, T: Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014.
142NESTA, Plan I: the Case for Innovation-led Growth, 2012. 35.
143Ibid
144R&D figures are for 2011. Allas, T; Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014,
31.
145Services do produce intangible assets which have an element of ‘innovation’, though not the sort measured by R&D – specifically technological
or scientific advances; Allas, T; Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014, 36.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
73
An international comparison of public and private R&D spending suggests little
evidence that the state ‘crowds out’ private investment – rather, the two seem to
be complements. While we should unquestionably be concerned with the quality
of research as well as the quantity, there is little evidence to suggest that countries
that are leaders on innovation are seeing diminishing returns from
their investments.146
The UK also lags behind its competitors in measurements of patents per capita.
Though the share of green technology as a share of total UK patents has increased
steadily since 2000,147 the UK has been outpaced in this area by other nations particularly Japan, South Korea and Germany.148 As a result, green patents now
account for 3 times the share of the UK’s innovation output that they did in 2000,
but the UK’s share of global green patents has actually fallen.149 Within Europe,
the European Eco-Innovation Observatory rates the UK relatively highly overall,
due to high scores on resource efficiency and socio-economic outcomes, but the
UK is the 7th worst performer on eco-innovation outputs – primarily patents
and publications.150
GOVERNMENT AND PRIVATE SECTOR FINANCED R&D AS % OF GDP IN 2011
BUSINESS AND THIRD SECTOR FINANCED R&D EXPENDITURE
3.5
KOR
3
FIN
2.5
DEN
SWE
GER
2
US
1.5
1
FRA
UK
IRE
CAN
NZ
ITA
0.5
AUS
NOR
ESP
0
0
0.2
0.4
0.6
0.8
1
1.2
GOVERNMENT FINANCED R&D EXPENDITURE
Fig. 14 “Government and private sector financed R&D as % of GDP in 2011”
Source: Allas, T, Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014.
146 Allas, T; Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014, 30.
147 Ekins, P and McDowall, W. Green Innovation: Industrial Policy for a Low-Carbon Future, TUC/UCL, 2014.
148Fankhauser, S. et al, “Who will win the Green Race? In search of Environmental Competitiveness and Innovation”, Global Environmental
Change, 23, 2013.
149 Martin, R et al; “Energy and the Environment: a cold climate for climate change policies?”, Centre for Economic Performance, 2015, 16.
150 Data for 2013; http://www.eco-innovation.eu/
74
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
Systems accounts of innovation would caution against a linear understanding
of how new ideas get from the stage of basic research to commercialisation and
diffusion. Instead, the emphasis is on the connections and feedback between
different public and private sector actors, which allow new ideas to be generated,
shared and made use of. This issue is linked to the familiar criticism of the UK
as being good at coming up with new ideas but bad at commercialising them.
However, it should be noted that on the evidence above, the UK is starting from
a disadvantaged position in terms of the input of R&D spending into the system,
even before weaknesses in the effective use of knowledge within this network
are considered.151
The process of translating new ideas into implementable means toward a
sustainable industrial economy is not just about the supply of innovation from
R&D, but also the demand from innovative firms. This is not to say that there
are not outstanding performers. ARM Holdings was recently rated the 5th most
innovative company in the world by Forbes; however, the UK’s total representation
in the list accounted for only five companies in the top-100.152 Not enough UK firms
are taking a lead on exploiting new sustainable technologies, for reasons relating to
firm-level decision making (as detailed in section 1), and the wider system in which
they operate (which will be discussed in section 4). It is telling that while wind
turbines were invented in the UK, very few are manufactured here currently. A
stable and committed policy approach to supporting low-carbon innovation, and to
championing the growth potential within these industries, is also a vital component
of greater private sector investment in these areas.
Finance for Innovation
The UK has deep and well-developed capital markets, and is a significant global
provider of financial services, so it seems strange to suggest that there is a shortage
of finance for innovation. What is important in this context is not the quantity of
capital but its type – specifically, a shortage of ‘patient capital’ that can remain
committed to worthwhile projects through long technology development cycles.
The uncertainty faced by investors in new innovations is not just related to what
is technologically possible, but also includes market uncertainty (a firm’s ability to
make the technology work at scale and to drive costs down to a competitive level)
and competitive uncertainty (fear that other market participants may create a
better or cheaper product).153
Corporate innovation laboratories have historically been an important generator
of private sector innovation, but have increasingly looked at odds with the trend
toward financialisation. Exemplars of these institutions, such as the AT&T Bell
labs and the Xerox PARC, would have a much harder time operating at such a
level of R&D under today’s prevailing focus on maximising shareholder value.154
This demise of the vertically-integrated corporation, first in favour of leaner firms
focused on ‘core competencies’, and then across globalised supply chains, led MIT
151 Mazzucato, M, The Entrepreneurial State, 2013, 52.
152The other UK companies were Reckitt Benckiser, Capita, Experian and Smith & Nephew; http://www.telegraph.co.uk/finance/
enterprise/11812335/Five-UK-firms-make-list-of-worlds-100-most-innovative-companies.html
153 Lazonick, W; “How Maximising Shareholder Value Stops Innovation”; Mission-Oriented Finance for Innovation, Policy Network, 2015.
154 Mazzucato, M The Entrepreneurial State, 2013, 24.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
75
researchers to question “whether the separation of innovation from manufacturing
will allow innovation to continue full-bore at its original home, or whether
separation comes at the price of learning and creation of capabilities that might
produce future innovation at the original home base”.155 For the UK in particular,
the break-up and demise of two former innovation leaders, ICI and GEC, from
the 1990s onwards, is indicative of the withering of the UK’s private sector
innovation capacity.156
Venture capital (VC) is usually identified as having the risk tolerance to bridge
the gap between basic and applied research, and establishing viability for
commercialisation. Indeed, VC has an important role in the development of new
technologies, and the UK matches the US relatively well in terms of VC investment
in clean energy technologies.157 However, VC does not provide the level of patience
which is often required for high-risk innovations; typically seeking to exit at the
stage of commercial viability within 3 to 5 years. In this regard, it has followed
the general private sector trend toward short-termism discussed in section 1.
Additionally the VC model is unsuited to high-capital intensity projects. Within the
matrix set out below, Ghosh and Nanda explain that VC tends towards the lower
right-hand box, leaving a gap in the high-risk, high-capital intensity category.158
MANY GREEN TECHNOLOGIES ARE HIGH-RISK,
AND WILL REQUIRE PUBLIC SUPPORT.
HIGH
CAPITAL INTENSITY OF PROJECT
Wind farm
LOW
Utility-scale solar
First commerical commercial plants for unproven
solar cell technologies
First-gen biofuel refineries
Advcanced biofuel refineries
Fabs for solar cells using
established technologies
Carbon sequestration
OFFSHORE
WINDFARMS
Offshore wind farms
Wind and solar components
of proven technologies
Energy Efficiency software
Internal combustion engines
Electric drive trains
Lighting
Insulation/Building material
Fuel cells/ Power storage
Energy efficiency services
Wind and solar components
TECHNOLOGY RISK
HIGH
CARBON
SEQUESTRATION
Fig. 15 Sub-sectors within Clean Energy;
Source: Adapted from Ghosh, S and Nanda, R, Venture Capital Investment in Clean Energy Sector”,
155 “A Preview of the MIT Production in the Innovation Economy Report”, 2013, http://web.mit.edu/pie/news/PIE_Preview.pdf
156 Jones, R, The UK’s Innovation Deficit and How to Repair it, 2013, 6-7.
157TUC/UCL, Green Innovation: Industrial Policy for a Low-Carbon Future, 2014, 31.
158 Ghosh, S and Nanda, R, “Venture Capital Investment in Clean Energy Sector”, 2010, 7-10.
76
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
Many of the technologies which will be relevant for a more sustainable
manufacturing sector in the future are located on the right side of the this matrix.
Some are within the top-right category, putting them beyond the consideration of
traditional funding avenues (debt or equity financing or retained earnings) as well
as many VC models. CCS has been identified as a key decarbonisation technology
for many energy-intensive industries, but this remains a high-risk technology and
industry estimates suggest that it will double the capital cost of a new cement plant,
which is currently in the region of £250-300 million.159 The same could be said for
the development of lighter weight, next generation materials with less through-life
environmental impact.160
The Role of the State
The state’s role in radical innovation is indispensable for two key reasons: its
tolerance for bearing risk across long-term development cycles which radical
innovations often require, and its ability to provide direction for technological
revolutions which have a transformative effect on the wider economic system.
Strong public commitment to horizontal industrial policy - skills, basic research
and competition policy - should be non-negotiable; however, simply providing the
background conditions for market players to operate is not sufficient to overcome
the uncertainty and risk which accompanies many areas of innovation. Market
failure-based approaches might be adequate (and indeed, crucial) for ‘patching-up’
incremental development within known technologies; however it does not provide
us with a roadmap for the creation of new, transformative technologies which can
drive a transition toward a more sustainable manufacturing sector.161
As Mariana Mazzucato has demonstrated, the state’s historical role in the
development cycle of radical technologies has extended well beyond the provision
of basic research. In the USA, a broad-based network of public institutions
have provided funding and collaborative support at all stages of the innovation
chain, through applied research, early stage technology development, product
development and production. In doing so, it has driven the development of the
internet, nanotechnology and aeronautical technology; areas of high risk and
uncertainty which may never have developed without the state providing patient
backing and a bold vision of what might be possible.162 Undoubtedly, the private
sector has grasped these technologies and brought its productive and creative
capacities to bear on the opportunity they provided. Nevertheless, the market
opportunity was made possible by the state’s willingness to choose and invest in
the direction of technological change.
159 Ekins, P and McDowall, W. Green Innovation: Industrial Policy for a Low-Carbon Future, TUC/UCL, 2014, 31.
160 Grant, P, “New and Advanced Materials”, Foresight Working Paper, 2013, 11
161 Mazzucato, M, A Mission-Oriented Approach to Building the Entrepreneurial State; Innovate UK, 2015; 8.
162 Mazzucato, M; The Entrepreneurial State; 2013, 62.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
77
The state’s role in the innovation system has been to a significant extent,
the product of historical context. Many of the state-funded technological
breakthroughs in the US during the 20th twentieth century fell under the rubric of
defence spending, despite often making the greatest impact through non-military
application of the technology. This level of funding and freedom to experiment – in
what was effectively a large-scale industrial policy in all but name – reflected a
strategic commitment to technological progress driven by the Cold War. This
strategic approach to scientific research also explains why UK spending on energy
research is now a fraction of what it was in the 1970s – at which point nuclear
fission accounted for the bulk of research expenditure.163 The challenges of making
UK manufacturing sustainable are of a very different variety to the geopolitical
challenges of previous decades. However, the urgent need to avoid the worst
impacts of climate change and resource depletion surely warrants a strategic
national focus on developing more sustainable technologies.
LITHIUMION BATTERIES
DOE
CLICK-WHEEL
RRE, CREN
MULTI-TOUCH SCREEN
DOE, CIA/NSF DOD
SIRI
DARPA
DRAM CACHE
DARPA
US PUBLIC
INVESTMENTS
WHICH LED
TO THE
IPHONE
NAVSTAR-GPS
DOD/NAVY
FIRST GENERATION IPOD
(2001)
SIGNAL COMPRESSION
ARMY RESREACH OFFICE
LIQUID CRYSTAL DISPLAY
NIH, NSF, DOD
MICROPROCESSOR
DARPA
MICRO HARD DRIVE
DARPA
Fig. 16 Source: adapted from Mazzucato, M. The Entrepreneurial State. 2013.
163 UK Energy Research Council, http://ukerc.rl.ac.uk/ERA002.html;
IPOD TOUCH & IPHONE
(2007), IPAD (2007)
HTTP/HTML
CREN
CELLULAR TECHNOLOGY
US MILITARY
INTERNET
DARPA
78
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
Mission-Oriented Innovation
In the past, specific overarching objectives have
underpinned national industrial policy. National
security concerns justified government support
for innovation during the cold war, while even
horizontal industrial policy from the 1980s
onward were driven by narratives of greater
competition within a globalised market. In recent
times, a number of thinkers have promoted the
idea of focusing public policy around ‘grand
societal challenges’, akin to John F Kennedy’s
challenge of putting a man on the moon by the
end of the 1960s. Such missions can be purely
technological, while others address broader
challenges which extend beyond a single area of
innovation.
in domestic manufacturing, rather than R&D.166
In essence, industrial policy has been focused
on getting a leg up on competitors, rather than
advancing the capabilities of the technology.
Concerns around gaining a competitive advantage
for national industries are likely unavoidable,
however the evidence does not provide great
support for the theory that merely ‘incentivising’
private sector actors will generate technological
advances at a sufficient level. As King et al note,
“even in the major international companies
which manufacture solar and wind equipment,
the ratio of R&D to sales is under 2%, compared
with over 5% in consumer electronics and 15% in
pharmaceuticals”.167
An example of this approach, explicitly referencing
the scale of the NASA moon missions, is the
‘Global Apollo Programme to combat Climate
Change’ proposed by Sir David King and
prominent members of the House of Lords.
This project proposes a ten-year effort from a
consortium of countries dedicating 0.02% of GDP
to R&D on renewable energy, energy storage and
transmission. The target is to spur on the advance
of solar technology to the point that it is cheaper
than new build coal energy world-wide by 2025.164
Industrial sustainability as a whole falls into
a broader category of societal challenges, as it
extends beyond a single technological objective
or area of policy. For policy-makers it is more
akin to the task of directing a ‘techno-economic
paradigm’, a theory closely associated with
Carlotta Perez of LSE. Sustainability within the
manufacturing sector requires a reconfiguration of
both production and consumption practices, but it
also requires a clear social purpose towards which
the possibilities represented by new technology
– particularly information communication
technology (ICT) - should be applied. According
to Perez, such a transformation also serves
sustainability in a social sense, as it “would create
growing demand for equipment, infrastructure,
and engineering, all redesigned in a green and
sustainable direction, while enabling increasing
production and innovation for the domestic and
export markets in all countries”.168
This is, of course, an attempt to hasten an already
occurring trend in the price of solar-generated
energy, which has fallen remarkably in the
past decade. Even more remarkable is that this
has been occurring when renewable energy
accounts for only 2% of publically funded R&D
globally – around $6 billion USD (£4 billion)
per annum.165 Public support for renewables
globally, including among those countries that
have had the most active industrial policies (such
as Germany and China), has been heavily tilted
toward support for deployment and investment
164King, D et al, ‘Global Apollo Programme to combat Climate
Change’, 2015.
165King, D et al, ‘Global Apollo Programme to combat Climate
Change’, 2015.
166Grau, T et al, Survey of Photovoltaic Industry and Policy in
Germany and China, 2011, 38.
167King, D et al, ‘Global Apollo Programme to combat Climate
Change’, 2015, 5.
168Perez, C; “Steering Economies toward the next Golden Age”,
Mission-Oriented Finance for Innovation, 2015, 56.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
79
GDP SHARE OF GOVERNMENT R&D SPENDING
ON ENERGY TECHNOLOGIES
UNITED KINGDOM
1.2
1
PERCENTAGE %
0.8
0.6
0.4
0.2
0
1970
1980
1990
2000
2010
TIME
INTERNATIONAL COMPARISON
.08
PERCENTAGE %
.06
.04
.02
0
FRANCE
GERMANY
JAPAN
KOREA
UK
USA
COUNTRY
RENEWABLE
HYDROGEN
NUCLEAR
EFFICIENCY
FOSSIL
Fig. 17 “GDP Share of Government R&D Spending on Energy Technologies”
Source: Martin, R et al, Energy and the Environment: a cold climate for climate change policies?
Centre for Economic Performance, 2015
80
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
The UK’s Approach to Innovation Policy
Evidence submitted to the inquiry was largely positive about the
model of Innovate UK and the wider innovation network (including
the Catapult Centres, Knowledge Transfer Network and others).
Specifically, the availability of grants through Innovate UK provided
an additional spur for internal firm decisions on investment which
might not have otherwise gone ahead. This is of particular relevance
for multinational corporations, which are often in internal competition for investments to be made in the UK, rather than in other
countries where the company might operate.
Innovate UK can also complement and add greater credibility to
other government efforts to set higher industry standards. The
provision of support and a platform for collaborative innovation can
reduce industry opposition to regulatory challenges that businesses
would otherwise have had to address on their own. Competitions
or challenge-driven projects can also help to stimulate debate and
innovation within industry. Innovate UK’s work with the construction products industry, and around the Zero Carbon Homes plan
(prior to its abandonment in mid-2015) are good examples of this.
Estimates suggest that Innovate UK support has returned between
£3 and £9 of added value for every £1 of public funds invested,
meaning that significant value for money is being achieved through
current investments.169
The wider context of innovation policy also includes the EU. The
availability of funding through programmes such as Horizon 2020
provides important opportunities for collaborative innovation in
areas which would benefit from scale beyond the UK alone. The
potential benefits of EU-wide industry work programmes to develop
sustainable innovations should be a key consideration of the UK’s
ongoing standing within Europe.
However, the scale of the UK’s network of public institutions trails
well behind more innovative competitors. Innovate UK funding for
2013 as a percentage of GDP was less than half what Germany spent
on its equivalent Fraunhofer Society, while Finland spent close to
10 times as much on its Tekes funding agency.170 In terms of specific
innovation and technology centres, the 9 established Catapult
Centres have some way to go to match the 67 Fraunhofer Institutes.
The Sustaining Growth in Innovation Enterprises, led by Philip
Shapira at the University of Manchester, found that the short-term
approach to funding and support within the UK’s innovation system
was perceived by SMEs producing green products to be a barrier
to the scaling-up of their operations. This is particularly true at
the intermediate commercial viability stage – the so-called
‘valley of death’.171
169Cable, V; “Challenges And Opportunities For A Knowledge-Based UK Economy”, Mission-Oriented Finance for Innovation, Policy Network,
2015, 80.
170Allas, T; Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014, 30.
171Uyarra, E Shapira, P and Harding, A, “Low carbon innovation and enterprise growth in the UK: Challenges of a place-blind policy mix”, 2015,
28.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
81
Procurement and Standards
The scale of the UK’s public innovation network
is but one aspect of the puzzle. Previous missionoriented approaches to challenges, and models
such as the Defence Advanced Research Projects
Agency (DARPA) in the US, included measures
for government procurement. In this way, the
state effectively helped to create a market for new
products, along with the products themselves.
Within the UK, the relaunch of the Small Business
Research Initiative (SBRI) in 2009 was aimed
at providing this ‘demand pull’ alongside the
‘technology push’ of traditional innovation
policy.172 The SBRI directs government contracts
to smaller R&D-driven companies through
competitions. However, it has lagged behind its
spending commitments for contracts awarded,
and the failure of many government departments
to engage with the system (or to direct contracts
to universities rather than businesses) has
blunted its impact.173
The UK government’s total expenditure amounts
to over 40% of GDP, which is a considerable
degree of economic weight which could be used to
promote sustainable innovation in manufacturing
from the demand-side.174 This is a lever for
sustainable innovation which the government
could make much better use of without
breaching the non-discrimination principle
of the World Trade Organisation (WTO). The
WTO’s Committee on Government Procurement
does allow for the application of “technical
specifications to promote the conservation of
natural resources or protect the environment”.175
172This was modelled on the US’ SBIR programme (Small Business
Innovation Research).
173Connell, D, Creating Markets For Things That Don’t Exist: The Truth
About UK Government R&D and How the Success of SBRI Points
the Way to a New Innovation Policy to Help Bridge the Valley
of Death and Rebalance the UK Economy, Centre for Business
Research, 2014, 12.
174HM Treasury, Statistical Bulletin: Public Spending Statistics
February 2015, available at https://www.gov.uk/government/
uploads/system/uploads/attachment_data/file/407690/PSS_
February_2015.pdf
175Article X, WTO, “Revised Agreement on Government
Procurement”, available at https://www.wto.org/english/docs_e/
legal_e/rev-gpr-94_01_e.htm
The UK is in fact regarded internationally
as a leader on some aspects of sustainable
procurement, with standards such as BS
8903:2010, set by the British Standards
Institution (BSI), providing a guide to
incorporating sustainability into public and
private sector purchases.176 This ability of the UK
to set globally recognised standards, as opposed
to having to adapt to the standards established by
other countries, is an underappreciated strength.
Our ability to do so does require that the UK
commit to a compelling vision of sustainability,
and take concrete steps to back up that vision with
credibility. This includes raising awareness and
encouraging adoption of such standards wherever
possible. Open data for energy and resource
efficiency in manufacturing, as already occurs
for buildings, should be an area which the UK
specifically aims to take a global lead on.
Although government procurement does include
consideration of externalities associated with
different products and services, government
departments’ ability to take a longer perspective
on sustainable manufacturing is limited by
how far out their budgets are set. The practice
of over-specifying government procurement
requirements can also limit innovative responses
that could meet the public sector’s needs in new
ways.177 Doing more in this area across a range of
products could not only save the taxpayer money
(without compromising on function or quality),
but could also help to stimulate the market for
remanufactured goods and raise awareness
across the wider economy.
176UNEP, Sustainable Public Procurement: A Global Review, 2013,
25.
177Ibid
82
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
It is here that US programmes such as SBIR (Small Business Innovation Research)
have played a vital role, with estimates suggesting that such public support
amounts for between two and eight times as much as VC funding at the same
stage.178 The UK also lacks public support for the deployment of new technologies
on the scale of the German KfW or Chinese Development Bank. It is these sorts of
institutions that have done much of the heavy lifting, in terms of providing patient
capital, for large scale renewables projects worldwide.179
A more active policy approach to driving radical innovation within sustainable
manufacturing necessarily entails a greater degree of risk. Supporting projects
across all stages of the innovation chain involves working in conditions of extreme
uncertainty, as innovation is by nature an unpredictable advance in our cumulative
understanding of what is possible. This means that support for innovation is a
discovery process, and involves experimentation for the public as well as private
sector.180
For policy-makers seeking to promote a sustainable direction for technological
progress, this requires supporting a broad portfolio of individual projects in a
decentralised, bottom-up manner. There needs to be a tolerance of the possibility
of failure for a significant proportion of this portfolio. If there was sufficient
certainty as to the likelihood of success prior to investing in an idea, the state’s
involvement would not be necessary in the first place. As Dani Rodrik has argued,
“under an optimally-designed program of industrial policy, some firms that
receive public support will necessarily fail. In fact, if every subsidized firm were to
prove financially successful, this would likely indicate that the program was vastly
under-performing”.181
Concern as to the wasteful use of public funds is both natural and justified, but
without proper context, there can be an excessive focus on the failures of government support without weighting them against the successes. Witness the backlash
in the United States for the failed public investment in the solar company Solyndra,
as opposed to the similar investment which helped the emergence of Tesla. What
is important is that policy-makers continue to engage in the fruitful exchange of
information with the private sector, and have confidence in their combined ability
to shape new industries and markets beyond any single failed project.
A greater role for the state at the riskier end of the spectrum of technological
possibilities also requires a commitment to developing capacity among those
responsible for making decisions on public investment in innovation. A broad,
experimental, portfolio-based approach to supporting innovation is also probably
better served by a more decentralised innovation system, which requires that
greater capacity and responsibility for innovation be developed within local enterprise partnerships (LEPs). The issue of the UK’s underdeveloped regional innovation networks has been recognised elsewhere,182 and the depth of similar networks
evident in countries such as Germany and Italy takes time to develop. Additionally,
more decentralisation of innovation support raises legitimate concerns over
coherence and coordination of policy, across what is already a diverse landscape of
agencies.
178 Mazzucato, M; The Entrepreneurial State; 2013, 48.
179 Climate Policy Initiative, The Global Landscape of Climate Finance 2014, 2014, 19.
180 Mazzucato, M, A Mission-Oriented Approach to Building the Entrepreneurial State; Innovate UK, 2015; 16.
181 Rodrik, D; “Green Industrial Policy”, 2013, 14.
182 Ekins, P and McDowall, W. Green Innovation: Industrial Policy for a Low-Carbon Future, TUC/UCL, 2014, 28.
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
However, policy-making in this area should be understood as being about diagnosis as much as implementation, at the level of regional networks and specific
industries. A sufficient degree of ‘embeddedness’, or understanding of the specific
challenges that firms are facing and the support they require, will require a
strengthening of institutions at a regional level. Connections between these
organisations also need to be deepened, so that policy-makers can learn from
successes in other regions.
83
84
Industrial Evolution - Making British Manufacturing Sustainable
3. Innovation
Policy Recommendations:
Recommendation 12
The scale and ambition of the UK’s innovation
network should match that of our competitors,
as well as the extent of the opportunities around
sustainability. Publically funded R&D should
be increased in order to place the UK economy
on a more even standing with other OECD
nations. This greater funding power should
be accompanied by an explicit remit to push
technological change (and economic growth)
in a sustainable direction. The innovation
network as a whole should have greater scope
to pursue a portfolio approach to supporting
innovation; funding a wide variety of projects
in an experimental, bottom-up and mission-led
manner. This approach requires a tolerance of
the possibility of failure in some projects, and an
emphasis on learning and re-evaluation so that
the portfolio as a whole can make a difference in
transformative technologies. Greater innovation
capacity should be developed at a regional level,
including through Local Enterprise Partnerships.
Recommendation 13
Government should make greater use of
procurement to provide a market for sustainably
manufactured goods, for instance through
ensuring greater engagement with the Small
Business Research Initiative (SBRI) programme.
Greater reporting of government purchases
of remanufactured goods, and road-mapping
targets for such products as a percentage of total
purchases, would provide greater certainty for
manufacturers looking to shift towards more
sustainable manufacturing practices.
Recommendation 14
Exemptions from the Climate Change Levy in the
form of Climate Change Agreements should be
reviewed, and consideration given to progressively
shifting support towards R&D in clean technology
and renewables.
Recommendation 15
The UK should take a lead in establishing
standards for open data in energy and resource
efficiency: the trend toward open data is one that
the UK should be ahead on, and establishing
ourselves as a leader in recognised standards for
data-sharing on efficiency.
4
COLLABORATION
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
Collaborative approaches to addressing
sustainability challenges can yield opportunities,
solutions and break­throughs that may never have
otherwise occurred. Deeper connections amongst
competitors, across supply chains or between
separate sectors or non-market entities can help
the spread and enhancement of knowledge to
the benefit of all.
With so much focus on the physical and ecological constraints facing the
manufacturing sector, it is in some ways comforting to think that “knowledge is the
only resource expanded by utilisation”.183 The accumulation of knowledge, skills
and innovation capabilities is recognised as central to improving productivity.184 It
is unusual to come across a manufacturing-fo­cused policy document which does
not encourage greater cooperation between firms. Yet due to various market and
system failures, opportunities for greater cross-sectoral collaboration and sharing
of knowledge are not being realised. The failure to take advantage of opportunities
to collaborate represents a loss to the UK in terms of profitability, employment and
environmental benefits, and successfully addressing this failure is crucial to the
task of fostering a sustainable manufacturing sector in the UK.
Knowledge can effectively spread throughout the economy via direct market
transactions or by indirect means. The former can involve the purchase of
knowledge (in physical or intangible forms) from parties external to a company, or
the sharing of knowledge through formally agreed collaborations. Non-formalised
transfers of knowledge are known as knowledge spillovers, arising when a firm
learns and benefits from the investment of others.185 Both forms of knowledge
transfer are crucial to the broader adoption of sustainable manufacturing practices
and the development of new ways of doing things. Yet both are likely to be
underprovided with a passive approach to industrial policy.
Sustainable manufacturing also requires that waste materials and energy be
captured and made use of wherever possible. Collaborations are crucial to the
development of effective systems of waste utilisation and circular economy, and
also present opportunities for new synergistic industrial arrangements built
around making use of others’ by-products and lost energy.
Industrial Commons
A new idea is only as useful as the structures and relationships around it allow
it to be. Changes in the structures of firms toward lean organisations focused on
‘core competencies’ has meant that new innovations are much more dependent
on capabilities external to the organisation in order to reach their potential. Thus
the innovation process within the manufacturing system is best understood as
a collective undertaking, from the point of conceptualisation and commercial
183 Seliger, G, Technische Universität Berlin, Presentation to Conference of the Centre for Industrial Sustainability , July 2015.
184 Crafts, N; “Creating Competitive Advantage: Policy Lessons from History”, 2012, 1.
185Bascavusoglu-Moreau, E and Li, Q,, “Knowledge spillovers and sources of knowledge in the manufacturing sector: literature review and
empirical evidence for the UK”, 2013.
87
88
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
start-up to the stage of scaling-up and making incremental improvements to
new products.186 This so-called ‘industrial commons’ argument recognises
that “production and innovation capacities of a given economic system depend
on the presence of multiple resources, such as R&D know-how, engineering
skills, technological capabilities, and specific manufacturing and prototyping
competences…. many of [which] are scattered across a large number of
manufacturing and services companies as well as other organisations”.187
The academic literature here stresses not only the interactions between those
with different capabilities, but the importance of retaining a critical mass and
diversity of mature manufacturing firms. Complementarities between a wider value
network of suppliers, distributers, designers, service providers and customers
are integral to our ability to make the most of new ideas, as well as the better
utilisation of knowledge attained from interactions with foreign companies. The
Massachusetts Institute of Technology ‘Production in the Innovation Economy’
project emphasises the importance of developed economies maintaining a core
of advanced manufacturing capacity and suggests that the “ongoing connections
between innovation and production, throughout the product cycle, are key to our
continuing ability to innovate and thus to grow the economy”.188
186 Locke, R and Wellhausen, R, Production in the Innovation Economy, MIT Press, 2014, 8.
187 Chang, H Andreoni, A and Kuan, M; “International Industrial Policy Experiences and the Lessons for the UK”, 2013, 14.
188 Locke, R and Wellhausen, R, Production in the Innovation Economy, MIT Press, 2014, 6.
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
89
Clusters
With greater globalisation of trade, supply chains
and production, and the prevalence of information
communication technology, knowledge has
become less constrained than ever by national
borders. The transfer of knowledge from overseas,
via international trade, foreign direct investment
(FDI) or the operation of multinational
corporations in the UK, in fact greatly outweighs
the contribution of domestic R&D.189
At the same time as global connectivity is enabling
the spread of information, the location of industry
continues to matter. Competitive benefits from
‘clusters’ of specific or complementary industries
in a particular area have long been recognised in
the form of cheaper transport costs, greater depth
of specialised skilled workers and suppliers and
the spread of knowledge. Lancashire cotton mills,
ceramics in Stoke-on-Trent and Silicon Valley are
all recognised examples of ‘external economies
of scale’. With regards to knowledge spillovers
in particular, close proximity of industries can
enable the diffusion of knowledge through labour
mobility, greater direct personal interactions
and easier opportunities for comparison and
assessment.
The need to shift manufacturing processes toward
more sustainable modes of operation provides
additional possibilities for clustering. The BIS/
DECC decarbonisation roadmaps undertaken
for the UK energy intensive industries identify
opportunities for the reuse of waste heat in other
industrial processes. This could be enabled by
greater clustering of industries with demand
for low grade heat near those that produce it in
excess. This is of particular relevance to the paper
and pulp and chemicals industries. Clustering
could also have benefits with regards to the
utilisation of biomass and carbon capture and
189Crafts, N; “Creating Competitive Advantage: Policy Lessons from
History”, 2012, 2.
storage infrastructure.190 The Teesside Collective,
the business case for which is currently being
explored, would be the EU’s first CCS-equipped
industrial cluster.
From a policy perspective, it appears that it is
considerably easier to identify an existing cluster
than to generate new ones. Although examples
such as Silicon Valley were significantly shaped by
government policy (specifically, defence policy),191
there still seems to be a significant element of
spontaneous evolution to clusters which active
policy measures have not been particularly
successful in replicating.192 However, policy
support for existing clusters may be beneficial
in strengthening network connections and
facilitating R&D, patient finance and specialised
skills training. Other areas of policy, such as
planning laws, can act as barriers to clusters.
Clustering on the basis of energy or carbon
reductions carries additional complications in
that it entails a greater degree of interdependence
between companies than a typical commercial
relationship. Relocating factories for this purpose
is unlikely where there are considerable sunk
investments in existing sites – however, new
enterprises or manufacturers ‘onshoring’ their
processes back to the UK could be presented with
significant opportunities for clustering in order to
share heat or carbon sequestration infrastructure
with existing factories.
190BIS/DECC; Industrial Decarbonisation & Energy Efficiency
Roadmaps to 2050, 2015.
191 Mazzucato, M, The Entrepreneurial State, 2013, 63.
192Uyarra, E and Ramlogan, R, “The Effects of Cluster Policy on
Innovation”, NESTA, 2012.
90
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
TRADITIONAL BENEFITS OF INDUSTRIAL CLUSTERS
FACTORIES IN CLOSE PROXIMITY
SUPPLY OF WORKERS
WITH NECESSARY SKILLS
SHARED
KNOWLEDGE
EASE OF
TRANSPORTATION
SUSTAINABILITY FOCUSED BENEFITS
SHARED HEAT
NETWORKS
RE-USE OF WASTE
AND BY-PRODUCTS
AS INPUTS
Fig. 18 “Traditional and Sustainability-Focused of Industrial Clusters”.
CARBON
SEQUESTRATION
INFRASTRUCTURE
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
91
Formalised Collaborations
Despite the importance and potential benefits of working with others to
incorporate new ideas into a company’s production processes, various factors
prevent this from occurring more often. Collaboration entails a significant
degree of uncertainty, whatever its form, and more radical partnerships require
companies to look outside of their core business and commit resources towards
often unpredictable possibilities.
Firms can collaborate vertically within a supply chain, or horizontally
across a wider value network.
AIRBUS
GENERAL ELECTRIC
ROLLS ROYCE
PRATT & WHITNEY
HORIZONTAL
COLLABORATION
TIER 1 SUPPLIER
TIER 2 SUPPLIER
TIER 3 SUPPLIER
VERTICAL
COLLABORATION
Fig. 19 ‘Horizontal vs Vertical Collaboration’
Customers are identified as a key source of knowledge, and UK firms have tended
to be more willing to engage with the end users of their products than with other
possible collaborators.193 There are certainly areas in which consumer demand can
be effective in pulling companies in a more sustainable direction. However this
potential driver may be limited by a lack of consumer information.
193Bascavusoglu-Moreau, E and Li, Q, “Knowledge spillovers and sources of knowledge in the manufacturing sector: literature review and
empirical evidence for the UK”, 2013, 20.
92
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
Transaction costs and information asymmetries often beset
collaborations with other commercial entities, and increase
the uncertainty which firms must deal with in working with
others.194 Suppliers are also a frequent and important partner
for collaborations. However, despite the potential benefits
of increasing efficiency and reducing environmental impacts
through collaborative relationships across the supply chain, these
transactions do not occur in isolation from relationships of market
power. Smaller players in particular may face reduced incentives to
redesign their products or processes if unequal bargaining power
is likely to result in the lion’s share of the gains being claimed by
others. From this perspective, vertically-integrated firms are likely
to have an easier time working together on sustainable products and
processes on a system-wide level, provided that decision-makers
within these organisations are able to overcome the organisational
barriers discussed in section 1. On the other hand, some suppliers
can secure their market position by offering tailored solutions to
their customers, though ownership of intellectual property rights is
an inherent transaction cost.
Collaboration and Varieties of Capitalism
Although we should be cautious in viewing existing institutions
as immovable or in any way pre-determined, it would seem
likely that collaborative approaches come more naturally to
firms within Coordinated Market Economies such as Germany
than to firms in the UK, which is an archetypal Liberal Market
Economy.195 Coordinated systems are characterised by “institutions
[including] powerful business or employer associations, strong
trade unions, extensive networks of cross-shareholding, and legal
or regulatory systems designed to facilitate information-sharing
and collaboration”.196 Within systems like the UK, these sorts of
connections are less developed. Instead, arms-length, market-based
relationships tend to prevail. Hence, UK firms are more likely to
face the prospect of having to develop connections and relationships
where none existed previously, if they are to take advantage of the
benefits of collaboration around sustainability.
Voluntary Collaborations
It is difficult for market players, however big, to have a complete
view of the supply chain, and of how a system as a whole might be
improved in a way which is more environmentally sustainable and
more profitable.
Collaboration between competitors can assist the spread of
knowledge and enable costs sharing, though concerns about market
competition and competition regulations can stymy this. The
194 Bastein, T. et al, Business Barriers to the uptake of Resource Efficiency Measures, POLFREE, 2014, 41.
195 See the discussion of the Varieties of Capitalism framework in the economic theory section.
196Hall, P and Soskice, D; “Introduction to Varieties of Capitalism” , in Varieties of Capitalism, 2001, 10.
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
possibility of competitors working together does bring in additional
concerns around their space to operate under competition policy.
This can foil or delay collaboration on research, best practice
sharing or common standards, even if the reality of legal barriers is
far less onerous than is often perceived.
Throughout much of the EU, competing companies engage in
much greater levels of collaboration than is typical in the UK,
despite operating under the same EU competition laws. For
example, Dutch companies commonly engage in data-sharing to
benchmark their efficiency performances. Established and wellproven processes, such as the approach taken by WRAP (Waste
& Resources Action Programme), can help ease these concerns.
Nonetheless, these concerns are an additional transaction cost
which prevents opportunities from being realised, and it can take
time for companies to feel comfortable within a more collaborative
operating space. Even successful sector-wide UK initiatives, such
as the Courtauld Commitment on waste within the grocery sector
(which was brokered by WRAP), took time to build up the necessary
level of trust among the participating firms. This model, prioritising
environmental gains but able to demonstrate the economic case to
individual actors, has had some other notable successes (such as the
Sustainable Clothing Action Plan) and is worth expanding upon.
However, there will be areas in which the gains are more elusive or
vague, or where other barriers exist to an agreement being reached.
In these situations, the threat of government regulation can provide
impetus toward industry agreements which might not otherwise
have occurred. Depending on the level of broad engagement with
a voluntary agreement, there might also be a good argument in
some cases for entrenching such agreements within legislation. This
balance of using the ‘carrot’ or ‘stick’ in some combination goes
directly to the ‘embedded autonomy’ approach discussed earlier
in this report. Policy-makers must be attuned to the concerns of
industry, and the (quite legitimate) complications that formulating
standards and other such measures can entail, while also being able
to send a clear and credible message that change will have to occur
in some way. Well-designed regulation, or the threat of regulation,
can be a driver toward industry turning its mind to innovation and
collaborative agreements, rather than efforts to oppose government
action.
Sources of knowledge
Bascavusoglu-Moreau and Li’s evaluation of UK innovation surveys
(UKIS) found that market-based sources of knowledge (suppliers,
clients and competitors) were the most common resource for
manufacturers to work with. Professional and industry associations
were reasonably well utilised, while government and higher
education institutes were the least well-utilised, with less than
10% of manufacturers engaging these sources. Higher technology
manufacturers, larger companies, multi-national corporations and
93
94
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
exporting businesses were more likely to take advantage of external
knowledge sources.197
Indirect Knowledge Transfers
As knowledge is a non-exhaustible resource, it has the potential
to help drive a transition to a sustainable manufacturing system
within all industries and within all countries. Its ability to do so
is determined by the depth of the connections through which
knowledge can flow between different actors, and their capacity
to make effective use of the information. Knowledge spillovers
include the ability to replicate the success of others, learn from their
mistakes, or benefit from the tacit knowledge of workers that is not
easily codified.198 Knowledge spillovers are a positive externality, as
the returns to the initial investment are not fully captured by the
party that made it. This means that society in general would benefit
from more of this investment than is likely to occur absent
a strategic policy approach.
The intrinsic difficulty of an externality is compounded when
the challenges of sustainability are taken into account. All
manufacturers would benefit from collective efforts to reduce
carbon emissions from production and to expand the scope of
human knowledge in which all can share; however, all (or at least
most) would prefer that others bear the weight of these efforts.199
Absorptive Capacity
The effective spread of ideas and technology related to sustainable
manufacturing, via strong inter-firm and cross-sector connections,
also requires that firms on the receiving end of these flows are able
to make use of it. ‘Absorptive capacity’ is defined as a firm’s “ability
to recognise the value of new external information, assimilate it, and
apply it to commercial ends”.200 There are numerous factors which
might affect this, but skills and education, investment in R&D and
organisational capabilities are among the most important.201
There is evidence that firms that are best able to take advantage of
external sources of knowledge have higher proportions of graduates,
particularly those who specialised in STEM subjects (science,
technology, engineering and mathematics). However, the process of
accessing, interpreting and applying new information to an existing
business model is likely to require the availability of a diversity of
skills at different stages. Tera Allas, in a report for BIS, suggests
that “scientific and technical skills may be needed to absorb external
197Bascavusoglu-Moreau, E and Li, Q, “Knowledge spillovers and sources of knowledge in the manufacturing sector: literature review and
empirical evidence for the UK”, 2013, 37-51.
198Ibid, 20
199 Rodrik, D; “Green Industrial Policy”,2013, 2.
200Cohen, W and Levinthal, P, “Absorptive Capacity: A New Perspective on Learning and Innovation”, Administrative Science Quarterly, 35:1,
1990.
201 Crafts, N and Hughes, A; “Industrial Policy for the medium to long-term”, 2013, 15.
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
knowledge whereas process, production and design skills may be
required to create firm-specific innovations”.202
Unsurprisingly, smaller firms often face difficulties with regards
to the technical skills required to make use of external knowledge,
or in having the resources to devote significant time to the task
ahead of day-to-day operations. Evidence submitted to this inquiry
suggested that smaller firms tend to rely more heavily on their
relevant trade association for guidance on sustainability. That
may be true in some sectors, but in aggregate the UK innovation
survey (UKIS) data finds that smaller firms rely on similar mixes of
knowledge sources as larger firms – it is just that far fewer of them
do so regularly. While trade associations may have a significant
role in assisting firms with sustainability, their potential impact is
likely limited by having to take into account the different absorptive
capacities of their members.
Intermediary Institutions –
The State as Broker and Facilitator
Intermediary coordinating organisations can help deepen the
connections between different actors in a way that reduces risk and
uncertainty and helps facilitate the spread of knowledge. They are
therefore an important focus for policy in the UK as the need to
develop more sustainable forms of manufacturing becomes more
pressing. Organisations such as Innovate UK and its associated
networks, the various Research Councils, and programmes such as
the RSA Great Recovery project and WRAP are crucial not just as
a means of ‘correcting’ market failures in the form of insufficient
innovation within the UK economy. They also have a vital role
in creating a vibrant ecosystem of connections and supportive
institutions which can help the spread of sustainable innovation
and expertise, and help create new markets for sustainable
manufacturers.
A clearly defined direction for innovation policy does not necessarily
mean a top-down process for pursuing this goal. In the US, a broad,
decentralised system of public agencies has long worked to foster a
network of collaborating actors across universities, corporations and
other intermediary groups. These organisations have considerable
operational autonomy to pursue specific challenges collaboratively.
This model is typified by the Defence Advanced Research
Projects Agency (DARPA), but also includes the National Science
Foundation (NSF), the National Institute of Health (NIH) and the
Small Business Innovation Research Programme (SBIR).203
Fred Block describes the role of this ‘Developmental Network State’ as not only
directing resources towards technological challenges, but also one of “opening
windows, brokering, and facilitation”. ‘Opening windows’, as an approach,
recognises that narrowly defined government objectives might exclude otherwise
beneficial ideas and that the state should “create multiple windows to which
scientists and engineers, working in university, government laboratories, or
202Allas, T; Insights from international benchmarking of the UK science and innovation system, Report to BIS, 2014, 12.
203 Mazzucato, M, The Entrepreneurial State, 2013.
95
96
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
business settings, can bring ideas for innovations and receive funding and other
types of support”.204
Brokering reflects the idea that public agencies with a broad overview of this
network might be in a unique position to connect different groups in a way which
might not otherwise have occurred. Mutually beneficial relationships can form
around the exchange and cross-pollination of ideas, or the linking of the right
innovation with the right business group or investor.
Facilitation is best described as a role for the state in reconciling new ideas and
existing systems. For more radical innovations, this can include investment in
necessary infrastructure (as was required with the railways or the internet). It can
also involve considering the impact of existing standards or regulations, which
might have unintended consequences when it comes to new products and ideas.205
A common complaint heard by this inquiry related to regulations around the
transportation of waste, particularly the EU’s REACH (Registration, Evaluation,
Authorisation and Restriction of Chemicals) regulation, which was not designed
with sustainability in mind, and is a perceived obstacle to increased recycling and
the circular economy.
This convening role for the state is not necessarily one which comes naturally to it,
at least in the case of the UK. While the depth of existing institutional linkages in
Germany might provide a better basis for the fostering and sharing of knowledge
around sustainability (particularly on a regional level), the UK has actually come
a long way in recent decades, and the existing system is worth building upon.
Projects such as Innovate UK’s collaborative R&D projects can serve as a platform
for new relationships or consortia, and can focus the talents of various actors
around a grand societal or technological challenge. Similarly, the establishment of
the catapult centres, technology-focused institutes that are focused on connecting
researchers and businesses and facilitating the commercialisation of new ideas, is
an important development for the UK’s ability to develop sustainable innovations.
The space in which collaborations emerge and develop is an important feature
of an innovation system, particularly with regards to realising cross-sectoral
opportunities that might exist beyond the social or economic interactions which
occur in the normal course of business. ‘Kissing frogs’ is the common shorthand
among proponents of industrial sustainability for unusual collaborations that
might result in worthwhile opportunities and partnerships; a textbook example
being Marks and Spencers’ clothes recycling project with Oxfam.
204Block, F, “Swimming Against the Current: The Rise of a Hidden Developmental State in the United States”, 2008.
205 Block, F, “Swimming Against the Current: The Rise of a Hidden Developmental State in the United States”, 2008.
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
97
CIRCULAR NETWORK OF COLLABORATION
R E S O U R C E M A N A G E M E NT
REG U
R ITIE S
S
ENTR EPRE NEUR S
C A P ITA L IS
TO R S
Fig. 20 “Circular Network of Collaboration”;
Source: RSA, The Great Recovery, The Role of Design in the Circular Economy, 2013
TE
SYS
I
D ES
CAT
DU
&E
I CS
S
I CE
NT
E
PR RS
AP AD E
LE
N KE
RS
HIP
D ESI G N
HI
MT
RS
I N EE
NG
GN E
IAL
D U STR
N
CT & I
U
PRO D
IO R
S & INTE R
A R C H ITE CT
TRA NSP ORT
CO MM S & DIG ITA L
TE XTIL E S
FA S H IO N
&
S
XER
CE
& FI
SERVI
ERS
SU M
ERS
MAK
RS
CO N
MA
RK
ETE
ER
S
ION
TS
H
LE E &
AD FE
E
C
R
S OUR
AC
SE
RE AD E
SE M
A
RC I CS &
HE
RE
RS
CO U SEARC
N CI H
LS
G IS
I NVES
O
OL
S
BUSI N
ESS
TS
CI E
V E NTU R E
E
SE
UK PL C LE AD ER
RS
EN
A
AC
DE
M
I NVESTO R S
L ATO
UM
&U
A UTH O
ENT
P
LO CAL
S
RO
DARD
ITE R
V.
NS
RS
WR
REM
H
NT
I CY
CU
GO
CO
A
IN
STAN
RO
AN
I ES
S
RTI
G
GA
PO L
CP
PE
N IES
S
E
ADV
BLI
M PAN
I LER
PU
RO
B R A N D S/ C O
IO N CO M PA
CO NSTRU CT
ACIN G
M ER F
CO NSUFACTU RERS
MAN U
E RS
CONSUMER FACING BRANDS
RETA
AK
ES
B2B CO M
MAN U FA PO N ENT
CTU RERS
YM
Y
S
S
RS
LI C
COVER
G IST
I ST
LS
PO
EU
IA L R E
LITIES
N O LO
TH
IN
K
T
AN
CA
KS
MP
A
I
GN
ER
PRE
S
S
S
&M
ED I
BUSI
A
NESS
A
S
SOCI
ATIO
NS
M ATE R
RE CYCL IN G FA CI
TE C H
LAN DFIL L MAN AGE RS
RIAL
NT
RIA
REFU RB
R E PA IR, N U FA CTU R E
& REMA
MATE
TS
CI E
MA
TE
LS
RS
ENSE
M IS
MA
NUF
ACTU
RE
D LI C
CH E
W
MA
M A N TE R I A
U FA L
CTU
RE
BR AN
L
RIA
RA
RIA
RTS
TE
MA
TE
MA
E
EXP
98
Organisations like the Catapults therefore need to continue to build linkages across
academia and industry, and to develop into spaces in which intractable problems
stumble across unexpected solutions. The broad provision of multi-faceted support
which characterises the German Fraunhofer model is not just a matter of
institutional design, but of developing capacity and networks of relationships.
It has also been noted that the Fraunhofer system tends to generate
commercialised innovations within established companies (owing to Germany’s
broad and well-established industrial base) rather than helping the emergence of
new companies.206 The Sustaining Growth in Innovation Enterprises project
involving the University of Manchester found that fast-growing firms in green
industries tended to be engaged with universities as sources of public support.
However, it also noted that the impact of these ‘triple helix’ connections with
universities and government was muted in comparison to the US.207 This suggests
that the catapult centres have not yet reached the same level of maturity as
comparable American networks.
The challenge for the UK’s innovation system is also to broaden the involvement
of the private sector in the exchange of knowledge around sustainability. The
availability of Innovate UK grant funding, and the work of organisations like
the Knowledge Transfer Network, have undoubtedly widened private sector
involvement in collaborative innovation. However, the engagement of companies
with these organisations is inevitably tilted towards those that already have an
inclination toward looking outside of the firm for opportunities to collaborate,
or which have the resources to devote to filling out a grant application. Wider
use of schemes such as innovation vouchers could be an important component in
helping younger companies in particular access academic, technical or
design expertise and support.
If deeper collaborative connections across the system are considered to be
important, a key question for the purposes of sustainability then becomes: what is
the best forum around which to convene a broader engagement with the challenges
of sustainability? Given that significant change within industries is likely to be
handled better by some companies rather than others, trade associations may
not be the best option for this, as it potentially conflicts with their representative
function on behalf of the whole industry.208 Professional bodies, such as the
different engineering institutions, working with government, could potentially
play a greater role in convening a critical mass of manufacturing firms around a
particular challenge. Dealing directly with one industry enables policy-makers to
develop a depth of understanding of sector-specific challenges. However this must
be balanced with a recognition that sustainability entails challenges that are not
neatly confined to one sector.
206Connell, D, Creating Markets For Things That Don’t Exist: The Truth About UK Government R&D and How the Success of SBRI Points the
Way to a New Innovation Policy to Help Bridge the Valley of Death and Rebalance the UK Economy, Centre for Business Research, 2014,
11.
207Shapira, P; “Sustaining Growth for Innovative Enterprises: Transatlantic Comparisons and Implications for the UK”; Workshop on Innovation and
Local Growth Enterprise Research Centre, Warwick Business School, 2015.
208Although the Green Building Council is an example of industry organising itself around concerns for a more sustainable built environment.
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
99
Industrial Symbiosis
Although firms have clear incentives to be efficient
within their own core processes, by-products,
surplus energy and spare capacity frequently
occur. This raises the possibility of synergistic
collaborations to make use of these resources as
inputs in a different industry, through approaches
such as ‘industrial symbiosis’. This can result in
the generation of new revenue, saving on waste
treatment expenses or landfill taxes and the
more efficient use of resources. The realisation
of such opportunities on a system-wide level
faces particular barriers. However, greater public
support for facilitating these linkages could help
the development of an industrial system that is
more than the sum of its parts in terms of energy
and resource efficiency.
It is by now a well-worn theme of this report, but
the mere fact that profitable collaborations exist
in theory does not mean that they are taken-up
in practice. Successful cases of industrial
symbiosis require an understanding of the waste
or by-products of others, or the suitability of
one’s own unused resources as input for other
industries’ processes. Even after this knowledge
gap has been overcome, uncertainty as to the
benefits of collaboration, frictions in coordinating
the schedules of separate processes and the
proximity of the facilities involved can frustrate
what would otherwise be rewarding relationships.
Industrial symbiosis can occur within planned
initiatives such as eco-industrial parks, but its
utilisation on a wider scale can be better promoted
through a facilitating agency. The National
Industrial Symbiosis Programme (NISP), which
operated as a national programme until 2014,209
is a well-known example of this model, which
has been recognised by the OECD and European
Commission. Facilitating here involves not just
the exchange of information between firms,
but the provision of expertise which can assist
in identifying opportunities and overcoming
technical issues. The inherent challenge of
209NISP is now run as a commercial entity by International Synergies
Limited.
facilitation for industrial symbiosis is that the
connections are between companies from different
sectors (akin to the ‘kissing frogs’ analogy above).
Hence, industrial symbiosis involves trying to
identify and develop relationships that would not
‘naturally’ occur.
NISP generated a good return on public
investment of between £5-£9 of value for every
£1 put in. Calculations of reductions in water and
material use, CO2 emissions and waste going to
landfill show that this occurred at a cost of less
than £1 per tonne.210 Additionally, industrial
symbiosis collaborations can generate positive
externalities which the system as a whole benefits
from. These include not only the benefits of
greater material efficiency, such as resilience
against resource insecurity and environmental
benefits, but also high levels of (cross-sectoral)
innovation and knowledge spillovers.
The challenge for this model in terms of having
a major impact on sustainability is to be able to
facilitate industrial symbiosis at scale. Dealing
with a broader range of companies most likely
means dealing with greater levels of corporate
inertia and uncertainty, and also requires more
workers with the skills to recognise and expedite
opportunities for industrial symbiosis. Policy
changes which might assist industrial symbiosis
having a greater impact include higher carbon
prices, better data on material flows and removing
regulatory barriers to the exchange and reuse
of waste. Maintaining the diversity of the UK’s
manufacturing base is also important in terms of
ensuring potential synergistic matches.
210 Ekins, P et al, Greening the Recovery: the report of the UCL
Green Economy Policy Commission, UCL, 2014, 153.
100
Industrial Evolution - Making British Manufacturing Sustainable
4. Collaboration
Policy Recommendations:
Recommendation 16
The industrial decarbonisation roadmaps undertaken by BIS and DECC should be expanded
to other key industries, with a broader remit
around long-term, strategic challenges faced by
the sector: these plans should act to inform the
policy-making process on sector-specific detail
and provide a basis for negotiated agreements on
what support government will provide, and what
expectations will be placed on industry to commit
to longer term collaborations. This may include,
for example, joint funding for dedicated training
and research facilities within universities.211
These agreements should then be advanced either
through existing industry leadership councils,
or by acting as the basis for new councils along
the same lines. These forums could then work
to inform the catapult focused on cross-sectoral
challenges, outlined in recommendation 7.
Recommendation 17
The Competition and Markets Authority (CMA)
should be tasked with working more closely with
trade associations and business consortia to
provide guidance at an earlier stage on data sharing and other forms of collaboration that might
otherwise be frustrated by uncertainty around
competition policy.
211Such as the Centre of Excellence for Food Engineering at
Sheffield Hallam University (https://www.shu.ac.uk/research/foodengineering/).
Recommendation 18
Government should expand efforts to foster
voluntary agreements around the efficient use of
materials and waste reduction, while providing
a clear signal to industry that regulations will be
imposed if a suitable agreement is not reached
within an acceptable timeframe.
Recommendation 19
The National Industrial Symbiosis Programme
(NISP) should be refunded as a national initiative,
accompanied by a broader review of policy
measures which can assist in scaling up its impact.
5
SYSTEM REDESIGN
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
The prevailing model of raw material extraction,
production, use, and disposal is not the result of any
immutable economic laws. Rather, it is the historical legacy
of a course of economic expansion which developed largely
unrestrained by planetary limitations, and which is
embodied in our existing stock of capital and systems of
production. New sustainable business models have the
potential to be both profitable and far-less environmentally
burdensome through focusing on meeting consumer’s
needs in new ways, retaining and reusing products and
material in a circular (or closed-loop) rather than linear
system of use and production.
This report has thus far dealt with barriers to greater business
leadership on sustainability; the need to develop greater resilience
to future disruptions to the supply of materials, energy and other
inputs; the state’s role as a partner in green innovation; and how
we can drive greater collaboration between all parties in society to
promote the spread of knowledge and higher standards as a means
to a more sustainable manufacturing system. On a longer time scale,
sustainability will also require shifts in the way that businesses
do business: the manner in which they provide value to their customers, and capture value for themselves through new models of
economic activity.
The UK is, in fact, a leader on thinking around new business models.
Among the most prominent examples of work in this area are:
•T
he work of the Ellen Macarthur Foundation on the
circular economy, including in conjunction with McKinsey
& Company
•T
he RSA Great Recovery Project, particularly with regards
to design in the circular economy
•T
he work of International Synergies and the National
Industrial Symbiosis Programme (NISP)
•C
harities such as Green Alliance and WRAP which conduct
research and various initiatives on recycling and new
business models
103
104
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
• The Scottish Institute of Remanufacture at Strathclyde
University, Glasgow
• EPSRC-supported work on industrial sustainability,
through-life engineering, Product Service Systems and
servitization
This report does not seek to add to that body of knowledge of what
is conceivable for businesses, but rather to focus on the role of
policy in enabling the broad emergence and adoption of new ways
of meeting consumers’ needs in more sustainable ways.
Government will undoubtedly make little headway in trying to
prescribe business models to the private sector or to consumers.
As economist/philosopher Amartya Sen has argued, the freedom to
engage in economic transactions and exchange is worth treasuring
in itself, regardless of any arguments as to the efficiency of
markets.212 While society can put reasonable restrictions on
the ways in which individuals conduct their business, in line
with social norms or objectives, such restrictions should be
imposed with caution.
Instead, sustainable businesses models must be demonstrated
as being economically viable, at scale, in a world of constrained
resources. This viability is not just a function of the business
models themselves, but of the wider system in which these new
enterprises will need to operate. Established regulations, forms
of capital investment, national infrastructure and supply chains
all contribute to a lock-in effect, or a degree of path dependency,
which can serve to lock-out other ways of doing business. The same
is true of cultural norms around how we fulfil our material needs.
For example, consumers will need to adjust to new manufacturing
approaches which increasingly separate the use of a good from
its ownership. Government has an indispensable role in reducing
consumer uncertainty and promoting the development of new
markets for sustainable business models.
A parallel can be drawn with the ‘new economic geography’ account
of globalisation. As global transport costs and barriers to trade fell
throughout the late 20th century, manufacturing businesses did
not all rush to the lowest-wage economy at one time, but were held
in place by the availability of inputs and proximity to markets (and
still are, in many cases).213 However, each firm that did offshore
reduced the cost for subsequent firms to do so by contributing
to the development of similar complementary networks in the
country of destination, pulling more and more firms towards
developing economies.214 A similar tipping point can be envisioned
for sustainable business models, whereby the development of a
more effective resource management infrastructure, complementary
regulations and financing options, product design for circularity
and willing consumers will encourage more and more firms to
adapt their businesses practices to a circular economy. The more
212 Sen, A, Development as Freedom, 2000, 26.
213 These are, essentially, ‘clustering’ effects of the sort discussed in section 4.
214 This is the Krugman-Venables model of agglomerations.
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
government can tilt institutions in a direction which is more
conducive to sustainable manufacturing, the more the UK will
benefit from the social, economic and environmental advantages
offered by this transformation.
What do we mean by System Redesign?
Sustainable business models include a broad range of ideas. Some
are specific to production within manufacturing, while others
focus on wider social (‘slow fashion’, environmental stewardship,
transparency) or organisational structures (social enterprises,
wider stakeholder models).215 A common thread throughout these
ideas as they relate to the industrial system is the rethinking of how
manufacturers create and capture value, and how this can be better
aligned with wider social and environmental goals.
Some of the most promising avenues of business model innovation
blur the line between manufacturing and services. Servitization can
range from the provision of assistance after the sale of a product
to ensure longevity and continued performance,216 to the delivery
of a function derived from a physical good while the manufacturer
retains ownership of it (Product Service Systems [PSS]). Some
of the most well-known examples of innovation in the latter
category include Rolls Royce’s ‘power by the hour’ provision of
engine use and Xerox’s shift from selling photocopiers to providing
‘document management solutions’, where they are paid per print
or copy.217 This shift reflects the fact that we primarily value
goods for the outcomes they make possible – what they contribute
to our wellbeing – rather than the mere fact that we own them.
The director-general of the Confederation of British Industry
recently noted that when these trends are taken into account,
manufacturing’s contribution to UK GDP might be as much as
19% - approximately twice what is normally reported in national
accounts.218
Applying these insights to business practices opens up opportunities
for higher and more stable revenue streams, attaining competitive
advantages and capturing value at the service-end of the product’s
lifecycle – all while producing much less on the basis of pure
volume. Servitization can potentially result in significant decreases
in resource use, and can also better align the firm’s interests with
the long-life and efficient performance of the manufactured good, as
well as its reuse.219
Other areas of sustainable business models for manufacturing focus
on generating value from waste in both products and processes;
recirculating used goods and materials back into the production
215Bocken, N et al, “A Literature and Practice Review to Develop Sustainable Business Model Architypes”, Journal of Cleaner Production, 65,
2014.
216Such as through-life engineering services; see EPRSC Centre for Innovative Manufacturing, “Making Things Work: Engineering for Life –
Developing a Strategic Vision”, 2015.
217 Baines T, et al, “The servitization of manufacturing; a review of literature”, in Journal of Manufacturing Technology Management, 20:5, 2009.
218“Manufacturing worth 19% of UK economy, according to CBI chief” The Manufacturer, September 2015; http://www.themanufacturer.com/
articles/manufacturing-worth-19-of-uk-economy/
219Bocken, N, et al, “A Literature and Practice Review to Develop Sustainable Business Model Architypes”, Journal of Cleaner Production, 65,
2014.
105
DESIGN AND THE CIRCULAR ECONOMY
RESOURCE
FACILITY
RECYCLED
MATERIAL
S
PERT
D ESI G N FO
R RE
-USE
ATERI
A
ANAG
ERY
UF
A
YM
LI C
AN
NT
COV
PO
IN M
L RE
EM E
FACT
U RE
MAN U
D ESI G N F
OR L
EAS
RS
E
AKE
UR
CT
FACTORY
EX
RESO U RCE M
RS
M
L
RIA
ATE
D E SI G N FO R M
ING
SEV
A N I ES
DS/ CO M P
NF
I NVESTO RS
I CE
D ESI G
OR
LO
NG
ATI O
N
EVITY
CONSUMER
UM
E
MI
CO
NS
C&
ED
UC
PRODUCT
ER
S&
USE
AC
RS
D ESI G N
D ESI G
N FO R A
C I R C U L A R E C O N O MY
Fig. 21 “Design and the Circular Economy”
Source: RSA, The Great Recovery, The Role of Design in the Circular Economy, 2013
AD
I N FLU EN CES
OR
BRAND
BR AN
106
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
cycle to break the link between manufacturing and raw
material extraction.
Examples of this line of thinking include:
• Circularity220 is an approach which stands in contrast
to the ‘linear’ account of traditional production and
consumption (‘take-make-dispose’), and involves the
joining up of the value chain so that end-of-life products
are reused as inputs, and waste is utilised as a resource
wherever possible. This requires the system-wide design
of products for durability, repair, upgrade, reuse and
recovery.221
• I ndustrial Symbiosis is the utilisation of waste and
by-products from one process as inputs in another.
• Remanufacturing is “a series of manufacturing steps
acting on an end-of-life part or product in order to return
it to like-new or better performance, with warranty to
match”.222 It is a similar but distinct concept from reuse,
refurbishing, repair and recycling.
Why are new business models necessary?
As noted, there are good economic reasons why businesses would
consider developing sustainable business models, regardless of
their benefits from an environmental point of view. What makes
sustainable business models an area of particular interest for
government is not just these potential environmental benefits,
but also the limitations of addressing sustainability purely from a
supply-side approach. Although the unrealised economic gains from
efficiency are considerable, it is not clear that this alone would be
sufficient to get us to a truly sustainable system without a radical
change in how consumers make use of manufactured products. The
same is true for technological change, which must advance (and
be widely implemented) at a rate sufficient to counter the trends of
world population growth and economic development.223
This is explained by the rebound effect, or Jevon’s paradox, which
says that the gains from efficiency improvements can be partially or
wholly offset by increases in the demand for the relevant product
as a result of lower prices. This is true of energy as well as products,
and can occur through either greater consumption or through
consumers choosing more material or energy-intensive products.
This is a key factor undermining the absolute decoupling of growth
and environmental impact, as whatever progress we make in
environmental impact per unit is undone in absolute terms by the
sheer weight of increased output.
220Other similar concepts include closed-loop, cradle-to-cradle, industrial ecology, biomimicry, natural capitalism and the performance economy.
Circular economy is used here for consistency.
221RSA – the Great Recovery, Investigating the Role of Design in the Circular Economy, 2013.
222This is the definition proposed for adoption by government in the All-Party Parliamentary Sustainable Resources Group (APSRG)/All-Party
Parliamentary Manufacturing Group (APMG) report, Triple Win: the Social, Economic and Environmental Case for Remanufacturing, 2014. It
is currently being considered for adoption by the EU Commission.
223 Tennant, M, “Sustainability and Manufacturing”; 2013, 30.
107
108
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
This, it should be recognised, is part of a feedback loop of increasing
supply and demand through productivity gains which has
underpinned advances in human wellbeing at a level that would
have been inconceivable just a few centuries ago. The consequences
of the industrial system continuing to operate in an unsustainable
manner mean that that connection is irrevocably severed.
Evidence suggests that the rebound effect differs between
products.224 However, its effect is difficult to anticipate in advance
as it depends on what consumers choose to do with the savings
from more efficiently produced products. Many of us would be
content with just one vacuum cleaner, no matter how much its cost
has fallen. As income increases, consumption tends to shift toward
more services, as people’s material needs become satiated. This may
mean that savings from cheaper manufactured goods are redirected
to less environmentally-taxing options. The corollary of this is that
the rebound effect is higher for lower income households, which
have greater unmet material needs.225 New innovations in the ways
in which manufacturers meet the needs of the market offer the
potential to escape this paradox.
What are the Opportunities from Sustainable
Business Models?
Materials and Resilience
Sustainable business models would enable a dramatic decrease in
material and raw resource consumption. Estimates from the Ellen
MacArthur Foundation, which quantified these potential benefits
for durable goods at an EU level, suggest that savings would be in
the range of $320 billion - $630 billion (£211billion to £416 billion)
per annum by 2035, depending on the scale of their adoption.226
The largest potential gains are in the automotive, machinery and
equipment, and electrical machinery sectors, as well as significant
potential gains in consumer goods such as packaged food, beverages
and textiles.227 WRAP estimates that the circular economy could
result in 20% less waste generated, and a decrease of 30 million
tonnes of material input into the economy by 2020.228
The recirculation of materials within the economy can help to build
national resilience to resource price volatility and supply shocks by
reducing manufacturers reliance on imported materials. The work
of the Green Alliance identifies metals, phosphorus and water as key
priorities for resilience-driven circularity.229 Business models such
as PSS that allow firms to retain ownership of the physical product
are potentially vital measures to ensure the continued access and
availability of CRMs. These models can help firms overcome the
challenge of recovering CRMs at the end of life, where it does
224Sustainable Lifestyles Research Group; papers available at http://www.sustainablelifestyles.ac.uk/projects/economy/mapping-rebound-effects
225Sussex Energy Group, “Mapping rebound effects from sustainable behaviour”, http://www.sussex.ac.uk/sussexenergygroup/research/recent/
mappingrebound
226Exchange rate is based on US$1 = £0.66; Ellen MacArthur Foundation, Toward the Circular Economy, Vol 1, 2012.
227Ellen MacArthur Foundation, Toward the Circular Economy, Vol. 2, 2013.
228WRAP, “WRAP’s vision for the UK Circular Economy to 2020”, available at http://www.wrap.org.uk/content/wraps-vision-uk-circulareconomy-2020
229 Green Alliance, Reinventing the Wheel: A Circular Economy for Resource Security, 2011.
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
not occur already due to their wide dispersal in low quantities.230
Models which rely on continued use of the product rather than
sales should also provide greater incentives for manufacturers to
prioritise durability, in-use product efficiency and design for re-use
or recovery.
Employment
In addition to the environmental benefits of sustainable business
models, such radical innovations can have beneficial knock-on
effects for employment and society at large. Innovation creates
new industries, new market players, and correspondingly new jobs.
However, as with all social and economic transformations, there will
be winners and losers, and some industries will find it easier than
others to apply new business models to what they do.
With regards to employment, the services sector is more labourintensive than manufacturing, so in theory the shift toward
servitization raises the potential for greater job growth within firms.
Whether this turns out to be a general trend toward more highquality jobs depends on how much employment is cannibalised
from existing manufacturing-related services (such as repairmen).
Low-carbon electricity is often regarded as having high job-creation
potential, but this partly reflects the fact that renewables are still a
maturing technology.231 As such, these jobs are likely to be relatively
low-productivity ones. The same is likely true for labour-intensive
recycling jobs.
The employment implications of a circular economy naturally
depend on the extent of its penetration within the economy. WRAP
and the Green Alliance provide estimates based on a number
of potential scenarios, and conclude (cautiously) that a circular
economy has the potential to provide low- to intermediate-skilled
employment in some regions of the UK that have suffered from high
unemployment in recent years, and to offset projected declines in
mid-level employment.232
Much of the employment benefits of a wide-scale shift to a greener
economy are likely to come about indirectly. New approaches to
manufacturing also require shifts in suppliers, infrastructure and
skills providers. In past technological revolutions (such as railways,
mass production or ICT), it is in these ‘induced activities’ around
complementary businesses and economic structures that the major
job creation has occurred.233
Barriers to Sustainable Business Models
Regulatory
Policy often has unintended consequences, which are a natural outcome
of seeking to codify complex real world behaviours into restricted and
230 Parker, D “The Future Impact of Material Security on the UK Manufacturing Industry”, 2013, 32.
231Fankhauser, S “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 12.
232WRAP and Green Alliance, Employment and the circular economy Job creation in a more resource efficient Britain, 2015.
233Perez, “Steering Economies toward the next Golden Age”, Mission-Oriented Finance for Innovation, 2015, 58.
109
110
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
unrestricted categories. Much of our current regulation was not created
with sustainable business models in mind. The potential for radical change
in the way many manufacturers operate means that policy-makers need
to be engaged with developments in the private sector. This involves
being proactive in updating regulation to suit contemporary needs (while
still addressing the underlying social objective of the regulation), as well
as being efficient in the accreditation of new innovations when this is
necessary. Examples of regulatory barriers to the circular economy and other
sustainable business models include:
• Labels: the RSA Great Recovery report on bulky waste noted that
used furniture which had had their fire labels removed were not able
to be resold by re-use organisations, meaning that these otherwise
valuable goods tended to end up in landfill;234
• REACH regulations at the EU level were not designed to promote
the take back and recycling of chemicals and can prevent circularity
with regards to used paint, for example.
• WRAP provided evidence to this inquiry that one company looking
to buy and resell used televisions needed separate VAT calculations
for each unique item, rather than being able to average out profit
margins. This effectively imposed a heavy transaction cost on each
unit, and heavily increased the administrative burden the company
faced.
While the enactment of these regulations was undoubtedly based on good
intentions, some may unintentionally curtail the development of promising
new business models. While it may be true that some of these barriers are
far from insurmountable, they do contribute to the perception of difficulty
around changing the way manufacturers operate, and pose a particular
obstacle for SMEs that might have less internal capabilities to dedicate to
compliance in this area.
Responsibility for policy areas of relevance to sustainable business models
cuts across BIS, DEFRA, DECC, HM Treasury as well as the Department for
Communities and Local Government (DCLG). Thus there are a large number
of entities which need to coordinate on the task of facilitating business
model innovation within the UK’s policy framework, not to mention private
sector and intermediary organisations. Additionally, much of this change is
better addressed at an EU-wide level. This would provide the opportunity
to establish a larger market for new manufacturing models to operate
within, while providing support to local-level experimentation through
organisations such as Innovate UK, WRAP, the RSA Great Recovery project
and the Knowledge Transfer Network. At the time of writing, the EU Circular
Economy package first announced in January 2015 has not been finalised.
There are, however, hopes that this will ultimately result in a broader focus
across the value chain on areas other than waste, including product design
and markets for secondary raw materials.235
It should also be noted that there are political economy issues at play here.
Business model innovation which emerges from disruptive new-entrants to a
234 RSA The Great Recovery, Rearranging the Furniture, 2015, 23.
235APSRG, The EU Circular Economy Package: Policy Priorities for the UK, Post-Event Briefing, July 2015.
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
market may face regulatory barriers of the sort discussed above. However, such
firms are likely to have less power to make sure that their perspectives are heard by
policy-makers and taken into account, compared to incumbent market players.
Infrastructure
For someone wishing to start a new, linear manufacturing business in an
established market, there are plenty of considerations to take into account.
However, in many ways, much of the thinking has already been done for them.
They will likely have the benefit of established supply chains which operate at scale,
and have evolved technologically and organisationally to provide inputs in a more
or less convenient form for manufacturers. Infrastructure exists at a national and
international level to allow them easy access to resources and components, and the
required industrial machinery is likely to be technologically advanced and suited to
high-volume production. At many levels, the established structures around firms
determine what makes economic sense in terms of how they operate.
It is little wonder then that resource-intensive modes of manufacturing
continue to dominate.
Conversely, those seeking to develop a business which makes use of waste streams
and recirculates material are confronted with a much different picture. Although
materials and goods that could theoretically be reused are all around us, they are
rarely in a form that is easy to make use of. Secondary materials are often widely
dispersed, not easily separated from other waste or from complex products, and
require considerable work to get to a useable state. Material complexity may bring
many benefits (including from the point of view of more sustainable industrial
processes), but the development of new alloys and polymers ahead of our ability
to take products apart and recover these materials poses a significant barrier to
the circular economy.
In some ways, these difficulties are inherent to the reuse of waste. Although
by-products can be reutilised within the firm to create new streams of revenue,236
business models that seek to make use of end-of-life products are typically
dependant on waste companies, local collection and recycling systems, and
(crucially) consumers themselves. Takeback schemes and deposits can and have
worked well for some products, such as British Gypsum’s plasterboard take-back
programme.237 However these approaches are less well suited to smaller and lowervalue products. As an illustrative example, large high-value permanent magnets
in wind turbines tend to be recycled, while the magnets in mobile phones do not.
Difficulties of the sort detailed above mean that it becomes uneconomical to sort
and recycle many lower-value materials. The end result is a system which results
in many waste streams being too costly, difficult or unreliable to utilise as an input,
while competing supply sources derived from raw materials have advantages of
both scale and efficiency that have been built up over many decades.
For potentially reusable products, the existing recycling system is ill-suited to
recognising and recovering value. Although the ‘waste hierarchy’ places reuse as
a higher priority than recycling, legislative targets around the latter mean that it
tends to dominate within the operation of waste management companies,
and there are few financial incentives for waste contractors to facilitate business
models around reuse.238
236 AB Sugar is a well-known example of this.
237http://www.british-gypsum.com/about-us/sustainability/plasterboard-recycling
238RSA The Great Recovery, Rearranging the Furniture, 2015, 17; APSRG/APMG, Triple Win: the Social Economic and Environmental Case for
Remanufacturing, 2014.
111
112
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
These inherent difficulties are exacerbated by the way the UK goes
about waste management. There are some bright spots within resource
management policy at a national level, including the ongoing work of WRAP,
and the impact of the landfill tax escalator.239 However, the fragmentation of
responsibility for waste between district, county and borough councils and
unitary authorities across England, Scotland, Wales and Northern Ireland240
results in a complex regulatory landscape for companies wishing to secure the
return of used products and materials.
Devolution of powers has resulted in more active approaches to waste in
Scotland and Wales, which have advanced ahead of the rest of the UK.241
However, the lack of a coherent national approach is an obstacle to a
more sustainable system as a whole, and also makes it more difficult for
manufacturers to provide consistent advice to their customers on the return
or recycling of products. The ongoing national debate on further devolution
of powers needs to take into account what impact this will have on efforts to
facilitate a system-wide change in our use (and re-use) of materials.
Measures such as long-term contracts for waste-to-energy plants, which
guarantee these plants access to certain quantities of municipal solid
waste, may be an improvement on landfills. However, they risk locking-in
investment in less sustainable uses of waste, which leads to the ongoing
incineration of materials that could otherwise be recycled (such as paper).
A similar problem might occur with manufacturers going down the route
of developing and using more light-weight materials, which may reduce
resource use but potentially poses challenges from a circular economy point
of view as it can be more difficult to recover this material.
The UK’s long-term underinvestment in infrastructure is well-recognised.
Additionally, from the point of view of economics, the provision of
infrastructure is complicated by its public good characteristics, network
externalities and lack of competition, which mean that there has always been
a strong rationale for government
239The landfill tax has had a significant impact on the landfill of municipal solid waste in the UK, and has also resulted in a considerable (and largely
coincidental) reduction in methane gas emissions. See European Environment Agency, Municipal Waste Management in the UK, 2013;
Fankhauser, S “A Practitioners Guide to a Low-Carbon Economy: Lessons from the UK”, Climate Policy, 2012, 11.
240 This is not to mention Waste Collection Authorities and Waste Disposal Authorities.
241 FCC Environment, Mapping the Politics of Waste, 2015, 2.
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
Closed Loop Environmental Solutions
Closed Loop Environmental Solutions is a company based in the
UK and Australia, and was the first to construct a factory for the
reprocessing of polyethylene terephthalate (PET) and high density
polyethylene (HDPE) bottles back to food-grade plastic. They helped
the recovery rate of plastic bottles in the UK rose from around 3% to
over 50%, diverting millions of bottles from landfill and reducing CO2
emissions by an estimated 52,500 tonnes annually.242 Dealing with a
widely dispersed and low-value product Closed Loop Environmental
Solutions relies on wider collection and sorting systems, which often
don’t do a good job of extracting value from waste and enabling the
reprocessing of materials.
Closed Loop Environmental Solutions is a partner in the consortium
Simply Cups, a paper cup collection and recycling system. Here, there
is a similar challenge of there being no good business case for waste
companies to sort and bale low-value materials. Disposable paper cups
are a multi-material but theoretically-recyclable product, made from
high grade paper with a plastic film coating. They are a classic example
of a product that consumers likely assume will be recycled if they place
in the recycling bin, but which the system fails to make the best use of.
Instead, responsibility for the product is passed down the chain and
much of the material ends up in incineration. The landfill tax provides
an opening for Simply Cups to operate as a paid collection service
for a supply chain-wide consortium of manufacturing, hospitality,
vending and catering companies (which arose out of an Innovate UK
competition). Expanding the project to the level of a paper cup recycling
facility would require the broad engagement of enough companies to
allow sufficient scale in the supply of material.
242http://www.closedlooprecycling.co.uk/about-us
113
114
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
to take an active role in this area.243 There is an urgent need to
avoid carbon lock-in through long-life investment in transport,
energy, water and telecommunications infrastructure that will
prove ill-suited to the needs of more sustainable manufacturing
models, as well as of future generations. One prominent example
is the gas distribution infrastructure. Investments in this network
should be directed toward adapting it for greener gases such as
hydrogen, rather than continuing to invest for the purposes of
natural gas which is inconsistent with long-term carbon targets.244
The importance of CCS to achieving the necessary reductions in
industrial carbon emissions further adds to the need for an effective
institutional framework for infrastructure.
A long-term, strategic approach to the direction of this sector is vital.
The coordination, maintenance and development of a wider system
that is sufficient to fulfil the potential of more sustainable business
models ought to be a strategic economic priority for the UK.
Finance for New Business Models
As with the wider economy, the financial system has evolved in a
way that reflects the traditional, linear approach to manufacturing.
As manufacturers continue to develop new sustainable business
models, there is the potential that entrenched approaches to lending
may pose a barrier to the more widespread adoption of new ways of
doing business.
The broader trend within finance has been a move away from
financing new business investment and increasingly towards real
estate lending. Financing manufacturing naturally poses a greater
challenge for bankers than mortgage lending, as it requires analysis
of a much broader range of questions than just credit-worthiness
and the value of the collateral property. As Adair Turner has
written, “left to itself, the banking system will overprovide credit
for real estate purchase and for real estate investment, and will
underprovide credit for business investment, business development,
and business innovation”.245
New business models pose some particular challenges for traditional
approaches to the provision of finance. PSS-type models rely on revenue through long-term ongoing contracts rather than one-off sales,
and it is here, rather than in the value of the asset itself, that the
profitability of the company lies. Financial institutions must adapt to
recognising the retained or potential value in assets and materials,
which is central to the circular economy, rather than applying valuation models which would write those assets down to zero (or to scrap
value).246 ‘Financial innovation’ has become somewhat of a loaded
term, but finding creative ways to fund and support new business
models is a vital component of a more sustainable future.
243 Ekins, P et al, Greening the Recovery: the report of the UCL Green Economy Policy Commission, UCL, 2014, 120.
244 Ekins, P et al, Greening the Recovery: the report of the UCL Green Economy Policy Commission, UCL, 2014, 132.
245 Turner, A “The Social Value of Finance: Problems and Solutions”, Mission-Oriented Finance for Innovation, Policy Network, 2015, 27.
246ING, Rethinking Finance in a Circular Economy, 2015, 38.
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
Consumer Preferences
The fostering of markets for new manufacturing business models
is an under-examined area of focus for policy-makers. Consumers
are, of course, well-used to being confronted with new products.
However, uncertainty around new ways in which products are
produced or how functions are delivered may pose a barrier to
new business models flourishing in the market. Concerns as to the
quality of goods that are remanufactured, or produced with recycled
materials, are something that government can help mitigate through
the effective use of standards – particularly championing them on
an EU-wide level. This is particularly important in order to ensure
that low-quality goods are not weakening consumer confidence in
these classes. Government procurement can also help attest to the
quality of these goods, as well as providing an additional demandside pull for sustainable manufacturers. For instance, the UK
military is a significant purchaser of Caterpillar’s remanufactured
machinery.247
Particular challenges face the more widespread use of servitization
models. Consumers in general are accustomed to owning most
of the goods they use, and a broad-based shift away from this
norm might encounter resistance. It therefore becomes even more
important that such goods remain consistent with consumer
expectations in other areas, particularly product quality. Greater
collaboration and data sharing by firms on market research could
help identify specific barriers to new business models and assist
their broader adoption.
Awareness has also been identified as a significant barrier to
servitization.248 Government procurement approaches which are
better suited to servitization, such as changing the way CAPEX and
OPEX budgets are determined for government departments, could
help avoid the lock-in of more resource-intensive approaches (as
well as saving the taxpayer money). Local authorities would likely
benefit from more procurement through servitized manufacturing
models, but financial uncertainty around their budgets can pose a
barrier to this happening.
247 APSRG, Remanufacturing: Toward a Resource Efficient Economy, 2014, 3.
248 Aston Business School, Servitization Impact Study, 2013.
115
116
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
Policy Recommendations:
Recommendation 20
Government should consider tying support for
energy- and resource-efficiency to other green
measures. This can help counter the rebound
effect by encouraging savings to be directed
toward other projects that promote sustainability.
For instance, the funding mechanism set out in
recommendation 1 could include the option for
businesses to dedicate a portion of their loan
repayments toward other measures that reduce
environmental impacts, such as onsite renewables
or product redesign.
Recommendation 21
Responsibility for resource management
infrastructure should be unified at a UK-wide
level, and national infrastructure institutions
must ensure that long-term investment decisions
are consistent with sustainable manufacturing,
and do not ‘lock-in’ unsustainable activities: with
debates as to further devolution still ongoing,
it is crucial that any steps in this direction take
into account its impact on efforts to facilitate a
system-wide change in our use (and re-use) of
material products. Institutions shaping national
infrastructure must also ensure that all future
investments are consistent with the needs of
more sustainable manufacturing, and avoid
locking future generations into an unsustainable
trajectory. This would be best served by an
independent Infrastructure Strategy Board249 with
an explicit remit for future-proofing infrastructure
for sustainability. Alternatively, Infrastructure
UK, which sits within HM Treasury, should
prioritise this function.
249Along the lines of the recommendation of the LSE Growth
Commission; Investing for Prosperity: Skills, Infrastructure and
Innovation, 2013.
Recommendation 22
Government should promote alternative business
models, and remove barriers to their development
and adoption; Manufacturers, particularly smaller
ones, need to see more clearly the benefits of
adopting circular business models and be shown
examples of how it can be done profitably. Despite
the prevalence of one or two poster companies
for the circular economy, the common view is
that this is a niche area applicable only to high
value goods. More pilots need to be conducted
and case studies developed in order to highlight
successful transitions and provide evidence of
how companies have overcome the challenges
in doing it. It is important that these pilots
work with manufacturers of all sizes, exploring
different business models and across a number
of different sub-sectors. Regulatory barriers to
more sustainable business models should be
removed. This should include the UK taking a
lead on measures at an EU level on issues such as
standards for recovered materials. It is important
that regulatory clarity extends to the reuse, repair
and remanufacture of products and spare parts as
well as materials and recycling.
Industrial Evolution - Making British Manufacturing Sustainable
5. System Redesign
Recommendation 23
Government should work to reduce uncertainty
around more sustainable manufacturing business
models by establishing standards for remanufactured products and utilising government procurement to provide a market for such products.
Government buying standards should also be
reviewed to make sure that practices are consistent with models such as Product Service Systems.
This should include piloting PSS schemes at local
government level to promote its application.
Recommendation 24
Innovation and coordinating bodies should
provide greater support to innovative business
models. Despite the clear environmental and
business benefits that can be achieved through
remanufacturing, it has traditionally received little
innovation support. Facilitating supply chain
discussions with relevant stakeholders on how to
design for the circular economy and implement
new business models can also help accelerate
their deployment.
117
118
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
Bibliography
—— Acemoglu, Daron, Philippe Aghion, Leonardo Bursztyn, and David Hemous.
“The Environment and Directed Technical Change”. American Economic Review.
102:1. 2012.
—— Allas, Tera. Insights from international benchmarking of the UK science
and innovation system. Report to BIS. 2014.
—— All-Party Parliamentary Sustainable Resources Group and All-Party Parliamentary
Manufacturing Group. Triple Win: the Social Economic and Environmental Case
for Remanufacturing. 2014.
—— All-Party Parliamentary Sustainable Resources Group. The EU Circular Economy
Package: Policy Priorities for the UK. Post-Event Briefing. July 2015.
—— All-Party Parliamentary Sustainable Resources Group.
Remanufacturing: Toward a Resource Efficient Economy. 2014.
—— Allwood, Julian M., Michael F. Ashby, Timothy G. Gutowski and Ernst Worrell.
“Material Efficiency: Providing Material Services with less Material Production”.
Phil Trans R Soc A. 2013.
—— Aston Business School. Servitization Impact Study. 2013.
—— Athanassopoulou, Nicky. “Reducing costs and carbon footprints: PrISMS
case studies from SMEs”. Presentation to Conference of the Centre for
Industrial Sustainability. July 2015.
—— Baines, Tim S., Howard W. Lightfoot, Ornella Benedettini and John M. Kay.
“The servitization of manufacturing; a review of literature”.
Journal of Manufacturing Technology Management. 20:5. 2009.
—— Baker, Susanne. Systems Innovation In Industry: Trends Across Sectors. EEF.
Presentation to Conference of the Centre for Industrial Sustainability. July 2015.
—— Baptist, Simon, and Cameron Hepburn. “Intermediate Inputs and Economic
Productivity”. Working Paper 94. Grantham Research Institute on Climate Change
and the Environment. 2012.
—— Baruah, Pranab, Nicholas Eyre, Jonathan Norman, Paul Griffin and Geoffrey
Hammond. ”Firm Level Perspective of Energy Efficiency Barriers and Drivers in UK
Industry – Indications from an Online Survey”. BEHAVE Energy Conference. 2014.
—— Bascavusoglu-Moreau, Elif and Qian Cher Li. “Knowledge spillovers and sources of
knowledge in the manufacturing sector: literature review and empirical evidence for
the UK”. 2013.
—— Bassi, Samuela, Rodney Boyd, Simon Buckle, Paul Fennell, Niall Mac Dowell, Zen
Makuch and Iain Staffell. ”Bridging the gap: improving the economic and policy
framework for carbon capture and storage in the European Union”. Grantham
Research Institute on Climate Change and the Environment. 2015.
—— Bastein, Ton, Wietske Koers, Koen Dittrich, Julianna Becker and Fernando J. Diaz
Lopez. Business Barriers to the uptake of Resource Efficiency Measures.
POLFREE. 2014.
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
—— BBC News, “Green Investment Bank to be part-privatised”. 25 June 2015. Available
at http://www.bbc.co.uk/news/business-33263710
—— Block, Fred. “Swimming Against the Current: The Rise of a Hidden Developmental
State in the United States”. 2008.
—— Bloom, Nick and John Van Reenen. “Why do management practices differ across
firms and countries?”. Journal of Economic Perspectives. 24: 1. Winter 2010.
—— Bloom, Nick, Christos Genakos, Ralf Martin and Raffaella Sadun. “Modern
Management: Good for the Environment or Just Hot Air?”. The Economic Journal.
120. 2010.
—— Bocken, Nancy, Samuel Short, Padmakshi Rana and Steve Evans. “A Literature and
Practice Review to Develop Sustainable Business Model Architypes”. Journal of
Cleaner Production. 65. 2014.
—— Bowen, Alex and Samuel Fankhauser. “The green growth narrative: Paradigm shift
or just spin?”. Global Environmental Change. 2011.
—— British Gypsum. “Plasterboard Recycling”. Available at http://www.british-gypsum.
com/about-us/sustainability/plasterboard-recycling
—— Cable, Vince. “Challenges And Opportunities For A Knowledge-Based UK Economy”.
Mission-Oriented Finance for Innovation. Policy Network. 2015.
—— Carbon Trust. Tackling carbon leakage: Sector-specific solutions for a world
of unequal carbon prices. 2010.
—— Chang, Ha-Joon, Antonio Andreoni and Ming Leong Kuan.
“International Industrial Policy Experiences and the Lessons for the UK”. 2013.
—— Climate Policy Initiative. The Global Landscape of Climate Finance 2014. 2014.
—— Closed Loop Recycling. “About Us”. http://www.closedlooprecycling.co.uk/about-us
—— Coady, David, Ian Parry, Louis Sears and Baoping Shang. “How Large are Global
Energy Subsidies?”. IMF working paper. 2015.
—— Cohen, Wesley M. and Daniel A. Levinthal. “Absorptive Capacity: A New Perspective
on Learning and Innovation”. Administrative Science Quarterly. 35:1. 1989.
—— Committee on Climate Change. Fact Sheet: Industry. Available at https://www.
theccc.org.uk/wp-content/uploads/2014/08/Industry-fact-sheet-2015-v1.1.pdf
—— Committee on Climate Change. Fourth Carbon Budget Review:
Chapter 4: Reducing Emissions from Industry. 2013.
—— Committee on Climate Change. Progress in Reducing the UK’s Emissions: 2015
Report to Parliament. 2015.
—— Connell, David. Creating Markets For Things That Don’t Exist: The Truth About
UK Government R&D and How the Success of SBRI Points the Way to a New
Innovation Policy to Help Bridge the Valley of Death and Rebalance the UK
Economy. Centre for Business Research. 2014.
—— Cooremans, Catherine. “Investment in Energy Efficiency: Do the Characteristics
of Investments Matter?”. 2012.
—— Coulomb, Renaud, Simon Dietz, Maria Godunova and Thomas Bligaard Nielsen.
“Critical Minerals Today and in 2030: An Analysis for OECD Countries”. OECD
Environment Working Paper No. 91. 2015.
—— Crafts, Nick and Alan Hughes. “Industrial Policy for the medium to long-term”.
2013.
—— Crafts, Nick. “Creating Competitive Advantage: Policy Lessons from History”. 2012.
119
120
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
—— Cridland, John. “What a good climate deal will mean for Britain and the world”.
Speech to BeyondParis. 22 September 2015. Available at http://news.cbi.org.uk/
news/what-a-good-climate-deal-will-mean-for-britain-and-the-world/
—— Dechezleprêtre, Antoine, Philippe Aghion, David Hemous, Ralf Martin and John
Van Reenen. “Carbon Taxes, Path Dependency and Directed Technical Change:
Evidence from the Auto Industry”. Centre for Economic Performance. Discussion
Paper 1178. 2012.
—— Department for Environment, Food and Rural Affairs.
Resource Management; a Catalyst for Growth and Productivity. 2015.
—— Department of Business, Innovation and Skills. Manufacturing in the UK. 2010.
—— Department of Business, Innovation and Skills/Department of Energy and Climate
Change. Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050;
Cross-Sector Summary. 2015.
—— Department of Business, Innovation and Skills/Department of Energy and Climate
Change. Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050:
Cement. 2015.
—— Department of Business, Innovation and Skills/Department of Energy and Climate
Change. Industrial Decarbonisation & Energy Efficiency Roadmaps to 2050:
Paper and Pulp. 2015.
—— Department of Energy and Climate Change. Energy Efficiency Opportunity
in the UK. 2012.
—— Department of Energy and Climate Change. What are the factors influencing
energy behaviours and decision-making in the non-domestic sector? 2012.
—— Department of Energy and Climate Change. 2050 Pathways Analysis. 2010.
—— EEF. “Government must take stronger action over looming
raw material shortage”. Available at http://www.eef.org.uk/
about-eef/media-news-and-insights/media-releases/2012/aug/
government-must-take-stronger-action-over-looming-raw-material-shortage
—— EEF. Be Prepared: Monitoring Supply Chains; Maximising Resilience. 2012.
—— EEF. Business Productivity and Energy Efficiency. 2014.
—— EEF. Materials for Manufacturing: Safeguarding Supply. 2014.
—— Efficient Energy.net. “Sustainability award for ceramic tiles manufacturer”. 3
February 2012. Available at http://www.efficientenergy.net/n/102613.htm
—— Ekins, Paul and Will McDowall. Green Innovation: Industrial Policy for a
Low-Carbon Future. TUC/UCL. 2014.
—— Ekins, Paul, Will McDowall and Dimitri Zenghelis. Greening the Recovery:
the report of the UCL Green Economy Policy Commission. UCL. 2014.
—— Ellen MacArthur Foundation, Toward the Circular Economy. Volume 2. 2013.
—— Ellen MacArthur Foundation. Toward the Circular Economy. Volume 1. 2012.
—— Energy and Climate Change Committee. “Use smart technology to cut
peak demand rather than coal”. 4 March 2015. Available at http://www.
parliament.uk/business/committees/committees-a-z/commons-select/
energy-and-climate-change-committee/news/emr-publication1/
—— Energy and Environment Management. “Cameron cancels pro-renewables speech
to industry dismay”. 24 April 2012. Available at http://www.eaem.co.uk/news/
cameron-cancels-pro-renewables-speech-industry-dismay
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
—— EPRSC Centre for Innovative Manufacturing.
“Making Things Work: Engineering for Life – Developing a Strategic Vision”. 2015.
—— European Commission. “Critical Raw Materials”. Available at http://ec.europa.eu/
growth/sectors/raw-materials/specific-interest/critical/index_en.htm
—— European Commission. Eco-Innovation Observatory.
Available at http://www.eco-innovation.eu/
—— European Environment Agency. Municipal Waste Management in the UK. 2013.
—— European Environment Agency. Decoupling graph available at
http://www.eea.europa.eu/publications/environmental-indicator-report-2012/
environmental-indicator-report-2012-ecosystem/part1.xhtml
—— Evans, Steve, Margareta Norell Bergendahl, Mike Gregory and Chris Ryan.
“Toward a Sustainable Industrial System”. 2009.
—— Fankhauser, Samuel, Alex Bowen, Raphael Calel, Antoine Dechezleprêtre,
David Grover, James Rydge and Misato Sato. “Who will win the Green Race?
In search of Environmental Competitiveness and Innovation”.
Global Environmental Change. 2013.
—— Fankhauser, Samuel. “A Practitioners Guide to a Low-Carbon Economy:
Lessons from the UK”. Climate Policy. 2012.
—— FCC Environment. Mapping the Politics of Waste. 2015.
—— Frontier Economics. Rates of return to investment in science and innovation.
Report prepared for Department of Business, Innovation and Skills. 2014.
—— Gardner, Liam. “Critical Materials and Resilience”. Presentation to
Conference of the Centre for Industrial Sustainability. July 2015.
—— Ghosh, Shikhar, and Ramana Nanda.
“Venture Capital Investment in Clean Energy Sector”. 2010.
—— Government Office for Science. The Future of Manufacturing. 2013.
—— Graedel, Thomas E., Julian Allwood, Jean-Pierre Birat, Matthias Buchert,
Christian Hagelűken, Barbara K. Reck, Scott F. Sibley and Guido Sonnemann.
“What Do We Know About Material Recycling Rates?”. 2011.
—— Grant, Patrick. “New and Advanced Materials”. 2013.
—— Grau, Thilo, Molin Huo and Karsten Neuhoff.
Survey of Photovoltaic Industry and Policy in Germany and China. 2011.
—— Green Alliance. Reinventing the Wheel: A Circular Economy for Resource Security.
2011.
—— Green, Richard and Xiao-Ping Zhang.
“The Future Role of Energy in Manufacturing”. 2013.
—— Haldane, Andy and Richard Davies. “The Short Long”. Speech to 29th Société
Universitaire Européene de Recherches Financières Colloquium. May 2011. http://
www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/
speech495.pdf
—— Hall, Peter and David Soskice. “An Introduction to Varieties of Capitalism”.
Varieties of Capitalism. 2001.
—— Hanson Cement Group. “Carbon – Climate Change and Energy”. Available at http://
www.hanson.co.uk/en/sustainability/carbon-climate-change-and-energy
—— Higher Education Commission. Too Good to Fail: The Financial Sustainability of
Higher Education in England. 2014.
121
122
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
—— HM Treasury. Statistical Bulletin: Public Spending Statistics February 2015.
Available at https://www.gov.uk/government/uploads/system/uploads/
attachment_data/file/407690/PSS_February_2015.pdf
—— Homkes, Rebecca. What role will leadership play in driving the future of UK
manufacturing? 2014.
—— Hughes, Alan. “Short-termism, impatient capital and finance for manufacturing
innovation in the UK”. 2013.
—— ING. Rethinking Finance in a Circular Economy. 2015.
—— International Energy Agency. “World Energy Outlook”. Available at http://www.
worldenergyoutlook.org/resources/energysubsidies/
—— International Energy Agency. Summing up the Parts. 2011.
—— Jones, Richard. “The UK’s Innovation Deficit and How to Repair it”. Sheffield
Political Economy Research Institute Paper No 6. 2013.
—— Kahneman, Daniel. Thinking Fast and Slow. 2011.
—— King, David, John Browne, Richard Layard, Gus O’Donnell, Martin Rees, Nicholas
Stern and Adair Turner. A Global Apollo Programme To Combat Climate Change.
2015. Available at http://cep.lse.ac.uk/pubs/download/special/Global_Apollo_
Programme_Report.pdf
—— Lavery, Greg, Nick Pennell, Simon Brown and Steve Evans.
Next Manufacturing Revolution. Lavery Pennell, 2degrees and Institute for
Manufacturing. 2013.
—— Lazonick, William and Mary O’Sullivan. “Maximising Shareholder Value: a New
Ideology for Corporate Governance”. Economy and Society. 29:1. 2000.
—— Lazonick, William. “How Maximising Shareholder Value Stops Innovation”.
Mission-Oriented Finance for Innovation. Policy Network. 2015.
—— List, Friedrich. The National System of Political Economy. 1841.
—— Locke, Richard M. and Rachel R. Wellhausen. Production in the Innovation
Economy. MIT Press. 2014.
—— LSE Growth Commission. Investing For Prosperity: Skills, Infrastructure and
Innovation. 2013.
—— Majumdar, Arun. “Why We Need Public Endowments For Transformative
Research”. Mission Oriented Finance for Innovation. Policy Network. 2015.
—— Martin, Ralf, Jonathan Colmer and Antoine Dechezleprêtre. “Energy and the
Environment: a cold climate for climate change policies?”. Centre for Economic
Performance. 2015.
—— Massachusetts Institute of Technology. “A Preview of the MIT Production in the
Innovation Economy Report”. 2013. Available at http://web.mit.edu/pie/news/
PIE_Preview.pdf
—— Mazzucato, Mariana and Caetano C. R. Penna (eds). Mission-Oriented Finance for
Innovation. Policy Network. 2015.
—— Mazzucato, Mariana. “Beyond Market Failures: Shaping and Creating Markets for
Innovation-Led Growth”. Mission Oriented Finance for Innovation. Policy Network.
2015.
—— Mazzucato, Mariana. A mission-oriented approach to building the entrepreneurial
state. Innovate UK. 2014.
—— Mazzucato, Mariana. The Entrepreneurial State. 2013.
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
—— McKinsey and Company/Ellen MacArthur Foundation. Towards the Circular
Economy: Accelerating the scale-up across global supply chains. 2014.
—— McKinsey Global Institute. Resource Revolution: Meeting the World’s Energy,
Materials, Food and Water Needs. 2011.
—— McKinsey Global Institute. Commodity Price Index. Available at http://www.
mckinsey.com/tools/Wrappers/Wrapper.aspx?sid=%7B0237E967-A10A489F-B428-C5AA3437D98F%7D&pid=%7B1A3A0AD3-E3DB-436E-BE0DA5A5BBF05006%7D
—— NESTA. Plan I: the Case for Innovation-led Growth. 2012.
—— OECD. Material Resources, Productivity and the Environment. 2015.
—— OECD. The Material Basis of the Global Economy. 2015.
—— Ofgem. Electricity security of supply report. 2015. Available at https://www.ofgem.
gov.uk/publications-and-updates/electricity-security-supply-report
—— Orion Innovations UK ltd. Walking the carbon tightrope: Energy intensive
industries in a carbon constrained world. Report prepared for TUC. 2014.
—— Parker, David. “The Future Impact of Material Security on the UK Manufacturing
Industry”. 2013.
—— Perez, Carlotta. “Financial bubbles, crises and the role of government in unleashing
golden ages”. FINNOV Discussion Paper. 2012.
—— Perez, Carlotta. “Steering Economies toward the next Golden Age”. MissionOriented Finance for Innovation. Policy Network. 2015.
—— Pike, Andy, Stuart Dawley and John Tomaney. How does Manufacturing contribute
to UK Resilience? 2013.
—— Polanyi, Karl. The Great Transformation. 1944.
—— Preston, Felix. A Global Redesign? Shaping the Circular Economy. Chatham House.
2012.
—— Rodrik, Dani. ‘No more Growth Miracles’. Project Syndicate. 2012.
Available at http://www.project-syndicate.org/commentary/
no-more-growth-miracles-by-dani-rodrik
—— Rodrik, Dani. “Green Industrial Policy”. 2013.
—— Rodrik, Dani. “Industrial Policy for the 21st century”. 2004.
—— RSA. The Great Recovery. Investigating the Role of Design in the Circular Economy.
2013.
—— RSA. The Great Recovery. Rearranging the Furniture. 2015.
—— Seliger, Günther. Presentation to Conference of the Centre for Industrial
Sustainability. July 2015.
—— Sen, Amartya. Development as Freedom. 2000.
—— Shapira, Philip. “Sustaining Growth for Innovative Enterprises: Transatlantic
Comparisons and Implications for the UK”. Workshop on Innovation and Local
Growth Enterprise Research Centre. Warwick Business School. 2015.
—— Sorrell, Steve, Alexandra Mallett and Sheridan Nye. “Barriers to industrial energy
efficiency: A literature review”. UNIDO. 2011.
—— Stern, Nicholas. Stern Review: The Economics of Climate Change. 2006.
123
124
Industrial Evolution - Making British Manufacturing Sustainable
Bibliography
—— Sussex Energy Group. “Mapping rebound effects from sustainable behaviour”.
Available at http://www.sussex.ac.uk/sussexenergygroup/research/recent/
mappingrebound
—— Sustainable Development Commission. Redefining Prosperity. 2003.
—— Sustainable Lifestyles Research Group. “Mapping rebound effects from sustainable
behaviours”. Available at http://www.sustainablelifestyles.ac.uk/projects/economy/
mapping-rebound-effects
—— Tennant, Mike. “Sustainability and Manufacturing”. 2013.
—— The Guardian. “Shareholders receive too much money from business – Bank’s chief
economist”. 25 July 2015. Available at http://www.theguardian.com/business/2015/
jul/25/shareholders-receive-too-much-money-from-business-says-chief-economist
—— The Manufacturer. “Manufacturing worth 19% of UK economy, according to CBI
chief”. September 2015. Available at http://www.themanufacturer.com/articles/
manufacturing-worth-19-of-uk-economy/
—— The Telegraph. “Five UK firms make list of world’s 100 most innovative
companies”. 19 August 2015. Available at http://www.telegraph.co.uk/finance/
enterprise/11812335/Five-UK-firms-make-list-of-worlds-100-most-innovativecompanies.html
—— Trade Union Congress. Building our Low-Carbon Industries. 2012.
—— Turner, Adair. “The Social Value of Finance: Problems and Solutions”.
Mission-Oriented Finance for Innovation. Policy Network. 2015.
—— UK Energy Research Council. “The Conduct of Energy R&D”.
Available at http://ukerc.rl.ac.uk/ERA002.html
—— United Nations Environment Programme. Decoupling Natural Resource Use and
Environmental Impacts from Economic Growth. 2011.
—— United Nations Environment Programme. Sustainable Public Procurement:
A Global Review. 2013.
—— United Nations Industrial Development Organisation. Green Growth:
From Labour to Resource Productivity. 2013.
—— Uyarra, Elvira and Ronnie Ramlogan. “The Effects of Cluster Policy on Innovation”.
NESTA. 2012.
—— Uyarra, Elvira, Philip Shapira and Alan Harding. “Low carbon innovation and
enterprise growth in the UK: Challenges of a place-blind policy mix”. 2015.
—— Wolf, Martin. The Shifts and the Shocks. 2014.
—— World Management Survey. “Manufacturing Report: 2011”. 2011. Available
at http://worldmanagementsurvey.org/wp-content/images/2011/11/WMS_
report2011_mfg_ENGLISH.pdf
—— World Trade Organization. “Revised Agreement on Government Procurement”.
Available at https://www.wto.org/english/docs_e/legal_e/rev-gpr-94_01_e.htm
—— WRAP and Green Alliance. Employment and the circular economy Job creation in
a more resource efficient Britain. 2015.
—— WRAP. “WRAP’s vision for the UK Circular Economy to 2020”. Available at
http://www.wrap.org.uk/content/wraps-vision-uk-circular-economy-2020
Industrial Evolution - Making British Manufacturing Sustainable
Steering Group & Secretariat
Steering Group & Secretariat
Inquiry Steering Group
The Co-Chairs would like to thank the inquiry steering group, all
of whom have committed substantial time to this inquiry, both
through the evidence gathering process, and in supporting the
drafting of this report. The recommendations made by this inquiry
do not necessarily reflect the views or opinions of individual steering
group members, or the inquiry’s sponsor.
Susanne Baker – EEF
Professor Nick Crafts – University of Warwick
Peter Digby – Xtrac
Professor Sam Fankhauser – Grantham Research Institute on
Climate Change and the Environment,
Sophie Thomas – Royal Society for the encouragement of Arts,
Manufactures and Commerce (RSA)
Kresse Wesling MBE – Elvis and Kresse
Secretariat
The Manufacturing Commission is powered by Policy Connect,
the leading network of Parliamentary groups, research commissions, forums and campaigns working to inform and improve UK
public policy.
Michael Folkerson – Manager, Manufacturing, Design and
Innovation
Toby Moore – Senior Researcher, Manufacturing Commission
125
126
Industrial Evolution - Making British Manufacturing Sustainable
Evidential Submissions
Evidential Submissions
Evidence Sessions and Interviews
Session One: 15th May 2015
Dr Greg Lavery, Lavery Pennell
Professor Nilay Shah, Imperial College London
Session Two: 22nd May 2015
Andy Brown, British Printing Industries Federation
Paul O’Donnell, Manufacturing Technologies Association
Jane Thornback, Construction Products Association
Dr Richard Leese, Mineral Products Association
Session Three: 9th June 2015
Arjan Geveke, Department of Business, Innovation and Skills
Session Four: 24th June 2015
Ian Collier, High Value Manufacturing Catapult
Ben Peace, Knowledge Transfer Network
Dr Richard Miller, Innovate UK
Peter Goodwin, Closed Loop Recycling
Session Five: 14th July 2015
Alan Norbury, Siemens
David Cornish, AzkoNobel
Vicky Pryce, CEBR
Peter Laybourn, International Synergies
Additional Interviews
Professor Mariana Mazzacuto, University of Sussex
Lord Adair Turner, Institute for New Economic Thinking
Dr Antonio Andreoni, School of Oriental and African Studies
Keith James, WRAP
Gerard Fisher, WRAP
Adrian Tautscher, Jaguar Land Rover
Professor Tim Jackson, University of Surrey
Industrial Evolution - Making British Manufacturing Sustainable
Evidential Submissions
Written Submissions
AzkoNobel
British Coatings Federation
British Geological Survey
British Printing Industries Federation
British Glass
Crafts Council
Dr James Colwill, Wolfson School of Mech. and Manf. Eng., Loughborough University
Dr Mike Tennant, Centre for Environmental Policy, Imperial College London
Dr Winifred Ijomah, Scottish Institute for Remanufacture, Strathclyde University
Professor Eileen Harkin-Jones OBE, University of Ulster
High Value Manufacturing Catapult
Innovate UK
Interface Solutions
Knowledge Transfer Network
Mike Baunton CBE
Mineral Products Association
International Synergies Ltd
The Centre for Sustainable Design, University of the Creative Arts
Professor Peter Childs, Dyson School of Design Engineering, Imperial College London
Steve Hope
UCL Sustainable Resources Institute
Unite
127
128
Industrial Evolution - Making British Manufacturing Sustainable
About the Manufacturing Commission
About the Manufacturing Commission
About
The Manufacturing Commission is a Parliamentarian- and
industry-led body which conducts high-level research inquiries
aimed at driving new thinking around industrial policy in the UK.
It is cross-party and cross-sectoral, and makes recommendations to
government and industry in order to instigate positive change in the
UK manufacturing sector.
The Commission’s work is generously supported by the EPSRC
Centre for Innovative Manufacturing in Industrial Sustainability
and the EEF.
Members
Neil Carmichael MP – House of Commons
Barry Sheerman MP – House of Commons
Kresse Wesling MBE – Elvis and Kresse
Prof. Shahin Rahimifard CEng FIMechE FHEA
– Loughborough University
Chris White MP – House of Commons
Dr Greg Lavery PhD, BE – Lavery/Pennell
Margot James MP – House of Commons
Hywel Jarman – EEF
John Stevenson MP – House of Commons
Mike Baunton CBE – SMMT
Prof. Adisa Azapagic FREng FIChemE FRSC – University of
Manchester
Prof. Nilay Shah – Imperial College London
Prof. Steve Evans CEng MIET – University of Cambridge
Prof. Eileen Harkin-Jones OBE, FREng FIMechE FIChemE –
University of Ulster
Chi Onwurah MP – House of Commons
Acknowledgements
The Co-Chairs, Steering Group and Secretariat would like to thank
all those organisations and individuals who have contributed to
the inquiry. In addition, special thanks must go to Naomi Turner,
Louise Young, Clare Morley, Anne-Marie Benoy, the EEF, Ian
Bamford, Carol Stanners and Mark Simmonds.
This work is licensed under the Creative Commons
Attribution-NonCommercial-NoDerivs 3.0 Unported
License. To view a copy of this license, visit
http://creativecommons.org/licenses/by-nc-nd/3.0/
or send a letter to Creative Commons, 444 Castro Street,
Suite 900, Mountain View, California, 94041, USA.
For further information, please contact
Michael Folkerson (Manager, Manufacturing, Design and Innovation)
Manufacturing Commission
Policy Connect
CAN Mezzanine
32-36 Loman Street
London SE1 0EH
[email protected]
0207 202 8586
http://www.policyconnect.org.uk/apmg/manufacturing-commission
www.policyconnect.org.uk
@DesignMfgGrp
Printed on recycled paper
Designed at Richard Chapman Studio
Sponsored by